Microeconomics 200

Chapter 3.3 Consumer Choice

Given preferences and budget constraints, we can now determine how individual consumers choose how much of each good to buy.

Consumers choose goods to maximize the satisfaction they can achieve, given the limited budget available to them.

The maximizing market basket must satisfy two conditions:

1. It must be located on the budget line. 2. It must give the consumer the most preferred combination of goods and services.

For example,

Three indifference curves describe a consumer’s preferences for food and clothing.

The outer-most curve, U3, yields the greatest amount of satisfaction, curve U2, the next greatest amount, and curve U1, the least.

Point B on curve U1, is not the most preferred choice, because a reallocation of income in which more is spent on food and less on clothing can increase the consumer’s satisfaction.

Point A – the consumer spends the same amount of money and achieves the increased level of satisfaction associated with indifference curve U2.

The baskets located to the right and above indifference curve U2, like the basket associated with Point D on the indifference curve U3, achieved a higher level of satisfaction but cannot be purchased with available income.

Therefore, Point A maximizes the consumer’s satisfaction.

Satisfaction is maximized when: * The marginal rate of satisfaction (of F for C) is equal to the price ratio. * The marginal benefit (benefit associated with the consumption of one additional unit of food) is equal to the marginal cost (the cost of the additional unit of food).

Marginal benefit is measured by the MRS.

Point A – equals to ½ (the magnitude of the slope of the indifference curve), which implies that the consumer is willing to give up ½ unit of clothing to obtain 1 unit of food.

The marginal cost is