第二十一章消费者选择理论详解.pptVIP

Instead of merely showing students the diagram for the case where one of the goods is inferior, let’s just remind them of the definition and see if they can figure out how to draw the diagram. In Active Learning 2, students determined that an increase in the price of a good pivots the budget constraint inward. Here, the price of a good is falling, so the budget line pivots outward. * On the previous slide, the fall in the price of fish caused a net decrease in Hurley’s demand for mangos: the substitution effect is greater than the income effect, as depicted on the following slide. However, it could have gone the other way: if the income effect were greater than the substitution effect, then Hurley’s demand for mangos would have risen. This diagram decomposes the movement from the old optimum (A) to the new one (C) into two parts. The first part, from A to B, represents the substitution effect. It shows the change in the optimal bundle due to the relative price change, holding constant the consumer’s level of well-being. The second part, from B to C, represents the income effect. It shows the change in the optimal bundle due to the increase in the purchasing power of the consumer’s income. The dashed line through point B is parallel to the new budget line through point C, indicating that we are holding relative prices constant to see how the increase in income affects the optimal bundle. This exercise is similar to Problem 2 in the back of the chapter. It reviews these concepts: indifference curves for substitutes and complements have different shapes the substitution effect shows the movement along an indifference curve from a relative price change The size of the substitution effect can be measured by how far the consumer moves along her indifference curve in response to a given relative price change. Why this exercise is relevant: Previously, we saw that the income and substitution effects work in opposite directions on the good