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20
CONSUMER
CHOICE:
MAXIMIZING
ECONOMICS UTILITY AND
Roger A. Arnold • Thirteenth Edition
BEHAVIORAL
©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or
ECONOMICS
duplicated, or posted to a publicly accessible website, in whole or in part.
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20-1 Utility Theory
2
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Theory of Consumer Behaviours
3
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Theory of Consumer Behaviours
4
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5
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20-1 Utility Theory :The Cardinal Utility Theory (TUC)
6
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20-1 Utility Theory (3 of 5)
7
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EXHIBIT 1
Total Utility, Marginal Utility, and the Law of Diminishing Marginal
Utility
8
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Total Utility and Marginal Utility
Total
Unit of Marginal
Utility
Good X Utility (Util)
(Util)
0 0 0
1 4 4
2 7 3
3 8 1
4 8 0
5 7 -1
• If TU is increasing, MU > 0
● When the total utility begins to
decrease, the
marginal utility = negative (-ve)
10
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20-2 Consumer Equilibrium (1 of 3)
● So far, we have assumed that any amount of goods and services are
always available for consumption
11
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20-2 Consumer Equilibrium and Demand (1 of 3)
● Example:
– I = 30
– PA=2
– PB=6
1 30 30 15 1 50 50 5
3 45 6 3 3 148 43 4.3
4 50 5 2.5 4 178 30 3
5 54 4 2 5 198 20 2
6 56 2 1 6 213 15 1.5
14
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Consumer Equilibrium
15
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16
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20-2 Consumer Equilibrium and Demand (2 of 3)
17
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The Ordinal Approach
18
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The Ordinal Approach- Indifference Curve (IC)
● An indifference curve is
the locus of different
combinations of two good
giving the same level of
satisfaction.
● Axes: both axes refer to
the quantity of goods
19
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The Ordinal Approach- Indifference Curve (IC)
● An indifference map is
a set of ICs showing the
preference of an
individual.
20
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Properties Of Indifference Curve
● Different ICs show different level of satisfaction.
• Far from the origin, the higher the satisfaction.
21
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Properties Of Indifference Curve
Convex to the origin
● the marginal rate of substitution (MRS)
decreased
23
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Properties Of Indifference Curve
24
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OTHER SHAPES OF INDIFFERENCE
CURVES
X and Y are perfect substitutes X and Y are perfect compliment
•ICs are right-angled
U3>U2>U1
U3
U2
U1
45 U3>U2>U1
Good X (Orange Jus) Good X (right sh
0 U1 U2 U3 0 o
CH 21 • 25
Budget Line
● Line showing all combinations
of items can be purchased for a
particular level of income (I) ;
• I =Px.Qx + Py.Qy
● Straight-line and downward sloping
• to use more goods X, Y should reduc
e & vice versa
• The slope depends on the prices of
goods X and Y, the slope = Px/Py
• In the X-axis, when the
quantity Y = 0, all I used to purchase
X; I = Px.Qx Qx =M/Px
• At the Y axis, when the
quantity X = 0, all I used to
purchase Y; M = Py.Qy Qy
=M/Py
26
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BUDGET LINE (BL): FEATURES
● Point A:
Y Expenditure <
Income
● Point B:
Expenditure =
C
B
Income
A
● Point C:
0 Expenditure >
X Income
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Budget Line Equation
XPX + YPY = I
28
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Budget Line Equation
29
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Consumer Equilibrium
30
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Consumer Equilibrium
Equilibrium conditions
1. The consumer
equilibrium must lie on
the BL.
2. The consumer
equilibrium is the
tangency point at which
the slope of IC equals
the slope of BL.
31
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