Daniel l. Rubinfeld

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Part :2 Producers, Consumers, and Competitive Markets Chapter 3 Consumer Behavior 7 fh'ifiii§i §iii Apple (gl:S~~~~ 4 (a) Perfect Substitutes Left Shoes 4 (b) Perfect Complements the degree of reduction in air pollution. Likev{ise, instead of referring to asbestos as a bad, we ''''ill refer to the corresponding good, the removal of asbestos. With this simple adaptation, all four of the basic assumptions of consumer theory continue to hold, and we are ready to move on to an analysis of consumer budget constraints. 3 3 2 2 1 0'----""-----''''----'''----'''-- 0'------------- 2 3 4 2 3 4 Orange Juice (glasses) Right Shoes In (a), Bob views orange juice and apple juice as perfect substihltes: He is always indifferent beh,yeen a glass of one and a glass of the other. In (b), Jane views left shoes and right shoes as complements: An additional left shoe gives her no extra satisfaction unless she also obtains the perfect substitutes Two goods for which the marginal rate of substitution of one for the other is a constant. In §2.1, we explain that goods are complements when an increase in the price of one leads to a decrease in the quantity demanded of the other. perfect complements Two goods for which the MRS is infinite; the indifference curves are shaped as right angles. other. In general, ,·\,e say that two goods are perfect substitutes when the marginal rate of substitution of one for the other is a constant. The indifference curves describing the trade-off between the consumption of the goods are straight lines. The slope of the indifference curves need not be - 1 in the case of perfect substitutes. Suppose, for example, that Dan believes that one 16- megabyte memory chip is equivalent to two 8-megabyte chips because both combinations have the same memory capacity In that case, the slope of Dan's indifference curve will be 2 (with the number of 8-megabyte chips on the vertical axis). Figure 3.6(b) illustrates Jane's preferences for left shoes and right shoes. For Jane, the two goods are perfect complements because a left shoe will not increase her satisfaction unless she can obtain the matching right shoe. In this case, the MRS of left shoes for right shoes is zero whenever there are more right shoes than left shoes; Jane will not give up any left shoes to get additional right shoes. Correspondingly, the MRS is infinite whenever there are more left shoes than right because Jane will give up all but one of her excess left shoes in order to obtain an additional right shoe. Two goods are perfect complements when the indifference curves for both are shaped as right angles. you were an automobile company executive, how would you decide when introduce new models and how much money to invest in restyling You would know that h,yo of the most important attributes of a car are styling (e.g., design and interior features) and pel/omlance (e.g., gas mileage and handling). Both are desirable attributes: The better the styling and the performance, the greater will be the demand for a car. However, it costs money to restyle a car, and it also costs money to improve its performance. How much of each attribute should you include in your new model The answer depends in part on the costs of production, but it also depends on consumer preferences. Two characterizations of consumer preferences are shown in Figure 3.7. People with preferences shown in Figure 3.7(a) place greater value on performance than styling: They have a high MRS and are willing to give up quite a bit of styling to get better performance. Compare these preferences to those of a different segment of the population shown in Figure 3.7(b). These low-MRS people prefer styling to performance and will put up ,'>'ith poor gas mileage or handling to get a more stylish car. Stvlina ~ " Styling - bad Good for which less is preferred rather than more So far, all of our examples have involved commodities that are" goods" i.e., cases in which more of a commodity is preferred to less. However, some things are bads: Less of them is preferred to //lore. Air pollution is a bad; asbestos in housing insulation is another. How do we account for bads in the analysis of consumer preferences The answer is simple: We redefine the commodity under study so that the consumer tastes are represented as the preference for less of the bad. This reversal hlrns the bad into a good. Thus, for example, instead of a preference for air pollution, we will discuss the preference for clean air, which we can measure as (a) Performance (b) Performance Preferences for automobile attributes can be described by indifference curves. Each curve shows the combinations of performance ~nd styling that give the same satisfaction. Consumers in (a) are willing to give up a considerable ... amount of styling for additional performance. The opposite is true for consumers in (b). ¥
72 Part '2 Producers, Consumers, and Competitive Markets Chapter :3 Consumer Behavior 73 Knowing which preference group is most prevalent can help executi\'es make strategi
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Daniel l. Rubinfeld

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