Microeconomics Essay

827 words - 4 pages

Economics 2A
Assignment 1

“Consumers are statistics. Customers are people.”
Stanley Marcus (1905 –2002)
In order to explain HOW economic theory determines the choices of the consumer, we need to know WHAT the theory states.
We use the terms baskets or bundles for groups of items, consumer preferences to tell us how the consumer ranks those baskets according to his tastes and we do that by:
1. Assuming the preferences to be complete, and that the consumer can distinguish which basket he prefers, or whether they are indifferent to him.
2. When a customer enjoys basket A better than B, and B better than C we assume that the preferences are transitive and accept that for him A > ...view middle of the document...

MRS equals the slope of the indifference curve. If the curve is convex, when we move along it, more cheese will be consumed and less wine. At some point, it will be harder for the consumer to give up another of the little bundles of wine he has to get more cheese.

Quantity of wine
Quantity of wine

5
5
B
B
C
C

4
4
A
A

3
3
Indifference curves
Indifference curves

Quantity of cheese
Quantity of cheese

15
15
5
5
10
10
20
20

Assuming that John is a rational consumer that will not pick a point above his budget line, as he will not be able to afford it, and it will not be below the line because he will have excess cash going to waste, he must pick a point from his budget line. I have drawn three indifference curves, each one gives different satisfaction and each represents different combinations of bundles. John has to pick one that crosses with his budget line.
Picking the basket bundle D ( I’ll skip the letter C – cheese ) would indeed give him maximum satisfaction, it contains more of both items and we already said that more is better. But it is unreachable for John, because it is out of his budget. He will pick either A or B.
The right one is A, it lies on the second indifference...

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