Web Chapter A

Consumer Choice Using Indifference Curve Analysis

Solutions to Exercises
1. Pa/Ph = ($150/week) / ($25/50 sg ft) = 300 sq ft / week The corner solution involving no auto transportation is disallowed by the remote location. 2. More of both apartment space and auto rentals is predicted if both are income superior, normal goods. 3. Product C results in less satisfaction per dollar spent than either A or B. Thus, Mrs. Jones should reallocate her consumption away from C towards A and B. 4. Indifference curves will be positively sloped and corner solutions may results, where no charity takes place. 5. In-kind gifts are always less preferred than an equivalent cash gift that maintains utility at the same level as the present. 6. Efficiency apartments are likely to have negatively sloped income-consumption curves because most customers would prefer other types of apartments, a duplex or a house as their income rises. Other products like steak dinners may become income inferior at higher incomes. 7. Netscape and Yahoo are generic substitutes for one another and will have the flattest indifference curves. Ski and ski bindings are perfect complements and will therefore have right-angular indifference curves. 8. Any particular generic two-bedroom apartments has many nearly perfect substitutes within the relevant apartment market, and they are quite close as substitute to other types of housing (duplexes, rental homes, etc.). Moreover, the price changes in apartment housing are long term, lasting a month or more. All three of these factors make for a larger substitution effect of a price change. In addition, apartment rent occupies the largest single expenditure of most apartment dwellers. This implies a larger income effect of the price change. Therefore, larger price and income effects make for a more price elastic demand.

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Web Chapter A/Consumer Choice Using Indifference Curve Analysis

9. Table salt has few alternative flavorings and is a tiny percentage of the budget so price cuts do not attract consumptions away from other expenditures and do not release much purchasing power to stimulate further demand. 10. The percentage of income spent on autos, the preference for American mid-size cars, the family composition, etc. 11. Kodak film established a unique brand around its paper and chemical processing. Price increases resulted in smaller reductions in demand because sutomers of the highly branded product perceived fewer substitutes. Later, as a generic film manufacturer, almost any positive price differential would drive large numbers of target customers to Fuji Film, Eckerd film, etc. 12. When price is reduced, thereby releasing purchasing power, income inferior goods experience a negative income effect that works to offset the positive substitution effect. Therefore, the overall effect of a price change is smaller than it would be with income superior goods, all other things the same.

This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher.