Unit 21: The Theory of Consumer Choice
Where the demand curve itself comes from: a budget line pivoting against an indifference map until the best affordable bundle locks into place.
6 topics · 20 questions
Each topic is a path, not a menu: work down it in order and every question builds on the one above. Click any of them to watch the answer draw itself.
The Budget Constraint
- How it worksHow does a budget constraint draw a straight line of every affordable combination of two goods, with a slope set by their relative prices?
- Worked exampleFind the budget line for a shopper with 60 dollars to spend on pizza at 10 dollars each and soda at 3 dollars a bottle.
- Common mistakeWhy doesn't a budget line curve — why is it always straight?
Your turn1 of 2
A shopper has 68 dollars to spend on pizza at 13 dollars each and soda at 5 dollars a bottle. If she spends all her income on pizza alone, how many pizzas can she buy?Indifference Curves
- How it worksHow does an indifference curve connect every bundle of two goods that gives a consumer the same total satisfaction?
- Common mistakeWhy don't two of a consumer's indifference curves ever cross each other?
- Going furtherWhat happens to the shape of an indifference curve for two goods that are perfect substitutes for each other?
- Ties togetherHow does an indifference map for two goods that are perfect complements connect to the idea of a fixed, unchangeable ratio between them?
Your turn1 of 2
A student draws two of a consumer's indifference curves crossing each other at one point. An economist says this drawing must contain an error. Why can't two indifference curves for the same consumer ever cross?The Consumer's Optimal Choice
- How it worksHow does the tangency between the budget line and an indifference curve mark the bundle where the consumer can't do any better?
- Worked exampleWalk me through finding the optimal bundle where the slope of the budget line equals the slope of the indifference curve at negative 2.
- Common mistakeWhy isn't the consumer's optimal choice simply the bundle with the most total goods in it?
Your turn1 of 2
A consumer has 96 dollars of income to split between two goods priced at 5 dollars and 5 dollars. Using the tangency condition MRS equals Qy divided by Qx, what is her optimal quantity of the first good?How a Change in Income Shifts the Budget Line
- How it worksHow does a rise in income shift the entire budget line outward in parallel, since it doesn't change the relative price of either good?
- Worked exampleFind the new optimal bundle after a shopper's income rises from 60 dollars to 90 dollars and both goods are normal goods.
- Common mistakeWhy doesn't a higher income always increase the quantity purchased of every single good a consumer buys?
Your turn1 of 2
A shopper's income rises from 54 dollars to 89 dollars, and she splits spending evenly between two goods using the tangency condition. For a good priced at 6 dollars, how many more units does she buy?How a Price Change Pivots the Budget Line and Traces Out a Demand Curve
- How it worksHow does tracking the new optimal bundle at every possible price of one good, holding income and the other price fixed, trace out that good's demand curve?
- Worked exampleWalk me through the budget line pivoting when pizza's price drops from 10 dollars to 5 dollars while soda's price and the shopper's income stay fixed.
- Ties togetherHow does this price-consumption path finally connect the indifference-curve machinery back to the ordinary demand curve from earlier in the course?
Your turn1 of 2
A consumer with 88 dollars of income splits spending evenly between two goods whenever MRS equals Qy divided by Qx. At a price of 3 dollars for the first good, how many more units does she buy than at a higher price of 8 dollars?Income and Substitution Effects
- How it worksHow does a price change split into a substitution effect, from the good becoming relatively cheaper, and an income effect, from the shopper's purchasing power rising?
- Worked exampleWalk me through decomposing the change in pizza purchases into a substitution effect and an income effect after pizza's price falls.
- Common mistakeWhy doesn't a good's demand curve have to slope downward if its income effect is strong enough and works in the opposite direction?
- Going furtherWhat happens to a good's demand curve if the income effect from a price drop is so negative it outweighs the substitution effect entirely?
Your turn1 of 2
A price falls from 6 dollars to 2 dollars, and the quantity bought rises from 12 to 21 units in total. If the substitution effect alone accounts for 0.28 of those extra units, how many units does the income effect account for?