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With $150 per month, Max can afford 15 movies and no concerts, . . .

15

12 movies and 1 concert or any other combination on the budget line.

12

Points belowthe line are also affordable.

C

9

D

6

But not points above the line.

E

3

F

Number of Concerts per Month

1

2

3

4

5

Figure 1 The Budget ConstraintA

B

H

G

Number of Movies per Month

1. An increase in incomeshifts the budget line rightward, with no change in slope.

30

15

Number of Concerts per Month

5

10

15

Figure 2 Changes in the Budget LineNumber of Movies per Month

2. A decrease in the price ofmoviesrotates thebudget line upward.

30

15

Number of Concerts per Month

5

15

Figure 2 Changes in the Budget LineNumber of Movies per Month

3. while a decrease in the price of concerts rotates it rightward.

30

15

Number of Concerts per Month

5

15

Figure 2 Changes in the Budget Line70

60

50

40

1. The change in total utility from one more ice cream cone . . .

30

20

10

1

2

3

4

5

6

Ice Cream Cones per Week

3. Marginal utility falls as more cones are consumed.

2. is called the marginal utility of an additional cone.

Utils

30

20

10

2

1

3

4

5

6

Ice Cream Cones per Week

Figure 3 Total and Marginal UtilityTotal Utility

Marginal Utility

A

15

B

12

C

9

D

6

E

3

F

Number of Concerts per Month

5

1

2

3

4

Figure 4 Consumer Decision MakingG

2. If his preferences are as given in the table, he'll choose point H

Number of Movies per Month

27

1. When Max's income rises to $300, his budget line shifts outward.

A

15

B

3.But different marginal utility numbers could lead him to H' or H''

12

H

C

9

D

6

E

3

F

1

2

3

4

5

6

7

8

9

10

Number of Concerts per Month

Figure 5 Effects of an Increase in IncomeH''

H'

1. When the price of concerts is $30, point D is best for Max.

2. If the price falls to $10, Max's budget line rotates rightward, and he choose point J.

15

Number of Movies per Month

K

10

8

3. And if the price drops to $5, he chooses point K.

6

0

3

5

7

10

15

30

4. The demand curve shows the quantity Max chooses at each price.

Figure 6 Deriving the Demand CurveJ

D

Price per Concert

$30

D

J

10

K

5

3

7

10

Number of Concerts per Month

Ultimate Max.

Effect

(Almost Always)

Figure 7 Income and Substitution EffectsPrice Decrease:

Substitution Effect

P

QD

Þ

QD

QD

if normal

Purchasing Power

QD

if inferior

Price Increase:

Substitution Effect

P

QD

Þ

QD

QD

if normal

Purchasing Power

QD

if inferior

Jerry Max.

George

Elaine

Price

Price

Price

$4

$4

$4

3

3

3

2

2

2

1

1

1

0

4

12

0

6

12

0

10

20

Figure 8 From Individual to Market Demand(a)

=

+

+

c

C'

C''

Number of Bottles per Week

Price Max.

$4

Market Demand Curve

3

2

1

3

10

27

44

Number of Bottles per Week

Figure 8 From Individual to Market Demand(b)

A

B

C

D

E

(a) Max.

(b)

Economics Score

Economics Score

90

90

80

80

70

75

80

70

75

80

90

French Score

French Score

Figure 9 Time AllocationF

E

D

C

C

1. If Max gets another concert… Max.

Number of Movies per Month

20

G

2. he could give up 9 movies and be just as satisfied.

3. For Max, points G and H are on the same indifference curve.

+1

11

H

-5

+1

-2

6

J

4

-1

K

3

L

Number of Concerts per Month

1

2

3

4

5

4. The indifference curve gets flatter moving rightward and downward along the curve.

Figure A.1 An Indifference Curve+1

-9

+1

1. Max prefers any point on this indifference curve…. Max.

Number of Movies per Month

3. And any point on this curve is preferred to any point on the other two.

2. to any point on this one

Number of Concerts per Month

Figure A.2 An Indifference Map20

G

R

11

H

S

J

6

1

2

3

Number of Movies per Month Max.

15

2. but point D--on a higher indifference curve--is preferred.

12

1. Points B and E are affordable.

9

3. At Max's best possible point, the budget line and indifference curve are tangent.

6

3

Number of Concerts per Month

1

2

3

4

5

Figure A.3 Consumer Decision Making with Indifference CurvesA

B

D

E

30 Max.

1. When Max's income rises to $300, his budget line shifts outward.

Number of Movies per Month

2. If his preferences are shown by these two indifference curves, he'll choose point H.

15

3. But different preferences could lead him to H'' or H'.

Number of Concerts per Month

5

10

Figure A.4 An Increase in IncomeH''

H

12

6

D

H'

3

6

1. When the price of concerts was $30, Max.

at point D.

2. But when the price of concerts falls to $10, their condition is satisfied at point J.

3. The demand curve shows the quantity of concerts Max chooses at each price for concerts.

Figure A.5 Deriving the Demand Curve(a)

15

Number of Movies per Month

K

10

8

J

D

6

1

2

3

4

5

6

7

10

15

30

Number of Concerts per Month

D

(b)

$30

Price per Concert

25

20

15

J

10

K

5

1

2

3

4

5

6

7

10

Number of Concerts per Month

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