1. 7 TOPICS FOR FURTHER STUDY

2. Session 14 The Theory of Consumer Choice

6. The Consumer’s Budget Constraint

8. Figure 1 The Consumer’s Budget Constraint Quantity of Pizza Quantity of Pepsi 0 Copyright©2004 South-Western Consumer’s budget constraint 500 B 100 A

10. Figure 1 The Consumer’s Budget Constraint Quantity of Pizza Quantity of Pepsi 0 Copyright©2004 South-Western Consumer’s budget constraint 500 B 250 50 C 100 A

14. Figure 2 The Consumer’s Preferences Quantity of Pizza Quantity of Pepsi 0 Copyright©2004 South-Western Indifference curve, I 1 I 2 C B A D

16. Figure 2 The Consumer’s Preferences Quantity of Pizza Quantity of Pepsi 0 Copyright©2004 South-Western Indifference curve, I 1 I 2 1 MRS C B A D

19. Figure 2 The Consumer’s Preferences Quantity of Pizza Quantity of Pepsi 0 Copyright©2004 South-Western Indifference curve, I 1 I 2 C B A D

21. Figure 2 The Consumer’s Preferences Quantity of Pizza Quantity of Pepsi 0 Copyright©2004 South-Western Indifference curve, I 1

23. Figure 3 The Impossibility of Intersecting Indifference Curves Quantity of Pizza Quantity of Pepsi 0 Copyright©2004 South-Western C A B

25. Figure 4 Bowed Indifference Curves Quantity of Pizza Quantity of Pepsi 0 Copyright©2004 South-Western Indifference curve 8 3 A 3 7 B 1 MRS = 6 1 MRS = 1 4 6 14 2

28. Figure 5 Perfect Substitutes and Perfect Complements Dimes 0 Nickels (a) Perfect Substitutes Copyright©2004 South-Western I 1 I 2 I 3 3 6 2 4 1 2

30. Figure 5 Perfect Substitutes and Perfect Complements Right Shoes 0 Left Shoes (b) Perfect Complements Copyright©2004 South-Western I 1 I 2 7 7 5 5

35. Figure 6 The Consumer’s Optimum Quantity of Pizza Quantity of Pepsi 0 Copyright©2004 South-Western Budget constraint I 1 I 2 I 3 Optimum A B

37. Figure 7 An Increase in Income Quantity of Pizza Quantity of Pepsi 0 Copyright©2004 South-Western New budget constraint I 1 I 2 2. . . . raising pizza consumption . . . 3. . . . and Pepsi consumption. Initial budget constraint 1. An increase in income shifts the budget constraint outward . . . Initial optimum New optimum

39. Figure 8 An Inferior Good Quantity of Pizza Quantity of Pepsi 0 Copyright©2004 South-Western Initial budget constraint New budget constraint I 1 I 2 1. When an increase in income shifts the budget constraint outward . . . 3. . . . but Pepsi consumption falls, making Pepsi an inferior good. 2. . . . pizza consumption rises, making pizza a normal good . . . Initial optimum New optimum

41. Figure 9 A Change in Price Quantity of Pizza Quantity of Pepsi 0 Copyright©2004 South-Western 1,000 D 500 B 100 A I 1 I 2 Initial optimum New budget constraint Initial budget constraint 1. A fall in the price of Pepsi rotates the budget constraint outward . . . 3. . . . and raising Pepsi consumption. 2. . . . reducing pizza consumption . . . New optimum

45. Figure 10 Income and Substitution Effects Quantity of Pizza Quantity of Pepsi 0 Copyright©2004 South-Western I 1 I 2 A Initial optimum New budget constraint Initial budget constraint Substitution effect Substitution effect Income effect Income effect B C New optimum

46. Table 1 Income and Substitution Effects When the Price of Pepsi Falls Copyright©2004 South-Western

48. Figure 11 Deriving the Demand Curve Quantity of Pizza 0 (a) The Consumer ’ s Optimum Quantity of Pepsi 0 Price of Pepsi (b) The Demand Curve for Pepsi Quantity of Pepsi Copyright©2004 South-Western Demand 250 $2 A 750 1 B I 1 I 2 New budget constraint Initial budget constraint 750 B 250 A

50. Figure 12 A Giffen Good Quantity of Meat Quantity of Potatoes 0 Copyright©2004 South-Western I 2 I 1 Initial budget constraint New budget constraint D A B 2. . . . which increases potato consumption if potatoes are a Giffen good. Optimum with low price of potatoes Optimum with high price of potatoes E C 1. An increase in the price of potatoes rotates the budget constraint inward . . .

52. Figure 13 The Work-Leisure Decision Hours of Leisure 0 Consumption Copyright©2004 South-Western $5,000 100 I 3 I 2 I 1 Optimum 2,000 60

53. Figure 14 An Increase in the Wage Hours of Leisure 0 Consumption (a) For a person with these preferences . . . Hours of Labor Supplied 0 Wage . . . the labor supply curve slopes upward. Copyright©2004 South-Western I 1 I 2 BC 2 BC 1 2. . . . hours of leisure decrease . . . 3. . . . and hours of labor increase. 1. When the wage rises . . . Labor supply

54. Figure 14 An Increase in the Wage Hours of Leisure 0 Consumption (b) For a person with these preferences . . . Hours of Labor Supplied 0 Wage . . . the labor supply curve slopes backward. Copyright©2004 South-Western I 1 I 2 BC 2 BC 1 1. When the wage rises . . . 2. . . . hours of leisure increase . . . 3. . . . and hours of labor decrease. Labor supply

56. Figure 15 The Consumption-Saving Decision Consumption when Young 0 Consumption when Old Copyright©2004 South-Western $110,000 100,000 I 3 I 2 I 1 Budget constraint 55,000 $50,000 Optimum

57. Figure 16 An Increase in the Interest Rate 0 (a) Higher Interest Rate Raises Saving (b) Higher Interest Rate Lowers Saving Consumption when Old 0 Consumption when Old Consumption when Young Consumption when Young Copyright©2004 South-Western I 1 I 2 BC 1 BC 2 I 1 I 2 BC 1 BC 2 1. A higher interest rate rotates the budget constraint outward . . . 1. A higher interest rate rotates the budget constraint outward . . . 2. . . . resulting in lower consumption when young and, thus, higher saving. 2. . . . resulting in higher consumption when young and, thus, lower saving.