Microeconomics_4__Besanko

Microeconomics_4__Besanko


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be
on the same indifference curve as A since they will be less
preferred than A. Thus, points on the same indifference
curve as basket A must lie to the northwest or southeast of
A, and the slope of the indifference curve running through
A must be negative.
Preference
directions
A
Indifference
curve
x
y
FIGURE 3.7 Indifference Curves Cannot Intersect
If we draw two indifference curves (with different levels of
utility U1 and U2) that intersect each other, then we create
a logical inconsistency in the graph. Since S lies to the
northeast of T, then U1 \ufffd U2. But since R lies to the north-
east of Q, then U2 \ufffd U1. This logical inconsistency (that 
U1 \ufffd U2 and U2 \ufffd U1) arises because the indifference curves
intersect one another.
A
U1
U2R
Q
T
S
Preference
directions
x
y
c03consumerpreferencesandtheconceptofutility.qxd 6/14/10 2:54 PM Page 85
86 CHAPTER 3 CONSUMER PREFERENCES AND THE CONCEPT OF UTIL ITY
The Marginal Rate of Substitution
A consumer\u2019s willingness to substitute one good for another while maintaining the
same level of satisfaction is called the marginal rate of substitution. For example, a
consumer\u2019s marginal rate of substitution of hamburgers for lemonade is the rate at
which the consumer would be willing to give up glasses of lemonade to get more ham-
burgers, with the same overall satisfaction.
When two goods have positive marginal utilities, the trade-off that the consumer
is willing to make between the two goods is illustrated by the slope of the indiffer-
ence curve. To see why, consider the indifference curve U0 in Figure 3.9, which
shows the weekly consumption of hamburgers and glasses of lemonade by a particu-
lar consumer, Eric. When Eric moves from any given basket, such as basket A, to an
equally preferred basket farther to the right on the curve, such as basket B, he must
give up some of one good (glasses of lemonade) to get more of the other good (ham-
burgers). The slope of the indifference curve at any point (i.e., the slope of the line
tangent to the curve at that point) is \u2014the rate of change of y relative to the
change of x. But this is exactly Eric\u2019s marginal rate of substitution of hamburgers for
lemonade\u2013\u2013the amount of lemonade he would give up (\ufffdy) to gain additional ham-
burgers (\ufffdx).
¢y\ufffd¢ x
B
A
U0
x
y
Preference
directions
FIGURE 3.8 Indifference Curves Are Not \u201cThick\u201d
A thick indifference curve U0 contains baskets A and B. But
B lies to the northeast of A, so the utility at B must be
higher than the utility at A. Therefore, A and B cannot be
on the same indifference curve.
B
C
D
A
U0
x, hamburgers per week
y,
 
gl
as
se
s 
of
 le
m
on
ad
e 
pe
r w
e
e
k Preference
directions
FIGURE 3.9 The Marginal Rate of Substitution of x for y
(MRSx,y)
The marginal rate of substitution of x for y (MRSx,y) is the rate
at which the consumer is willing to give up y in order to get
more of x, holding utility constant. On a graph with x on the
horizontal axis and y on the vertical axis, MRSx,y at any basket
is the negative of the slope of the indifference curve through
that basket. At basket A the slope of the indifference curve is
	5, so MRSx,y \ufffd 5. At basket D the slope of the indifference
curve is 	2, so MRSx,y \ufffd 2.
marginal rate of sub-
stitution The rate at
which the consumer will
give up one good to get
more of another, holding
the level of utility constant.
c03consumerpreferencesandtheconceptofutility.qxd 6/14/10 2:54 PM Page 86
3.2 UTILITY FUNCTIONS 87
As can be seen in Figure 3.10, Super Bowl ad
prices gradually rose over time to the record price in
2009. Ad prices tend to be higher when a more excit-
ing game is anticipated. For example, prices rose dra-
matically for the 1998 Super Bowl, when the Denver
Broncos upset the Green Bay Packers for the champi-
onship of the National Football League in a very close
game. Prices sometimes decline during a recession, as
they did in 2001 and 2002. Despite the severe reces-
sion in 2009, prices rose. As a result, NBC was re-
ported to have more difficulty selling all of the com-
mercial slots than in prior years (both FedEx and
General Motors, regular Super Bowl advertisers, did
not buy ads that year). Average prices may have been
higher because many ads were sold prior to
September 2008, when the recession began to be felt
most strongly.
The government and interest groups can also
influence consumer preferences. For example, in
1953 the American Cancer Society issued its own
warning about smoking, when it published a report
linking cigarette smoking with cancer. Some govern-
ments require cigarette producers to place graphic
pictures (e.g., of oral cancer) on packages as a warn-
ing to consumers about the dangers of smoking. 
The theory of consumer behavior assumes that the in-
difference map for a consumer is given exogenously
and remains fixed. In reality, a consumer\u2019s preferences
can change over time, and with age, education, or ex-
perience. Preferences may also change as a result of
actions designed to influence consumer attitudes
about goods and services.
Firms often pay great sums of money for the op-
portunity to influence your preferences by advertis-
ing. For example, for the telecast of the 2009 Super
Bowl, NBC was able to charge an average of $3 mil-
lion for each 30-second commercial. Why would an
advertiser pay so much? Super Bowl ratings are al-
ways high, regardless of how interesting the game
is. When ratings are high, advertisers know their
messages will reach millions of households. In addi-
tion, while TV viewers often find commercials to be
an annoyance, that changes during the Super Bowl.
Many viewers look forward to the humorous and
creative ads that companies run during the game.
Furthermore, advertisers get extra publicity from
good ads, since the media discusses Super Bowl ads
at great length.
A P P L I C A T I O N 3.1 
Influencing Your Preferences
FIGURE 3.10 Prices of Super Bowl Television Ads
The prices of 30-second ads are expressed in 2009 dollars.
Sources: Advertising Age for 1969\u20132007; Reuters for 2008\u20132009.
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
$0
1969 1974 1979 1984 1989 1994
Super Bowl Ad Prices
(30-second ad)
Pr
ic
e 
(20
09
 do
lla
rs
)
Year
1999 2004 2009
c03consumerpreferencesandtheconceptofutility.qxd 7/14/10 2:09 PM Page 87
88 CHAPTER 3 CONSUMER PREFERENCES AND THE CONCEPT OF UTIL ITY
For instance, the slope of Eric\u2019s indifference curve at point A is 	5, which means that
at the level of consumption represented by basket A, Eric would be willing to trade 5
glasses of lemonade for 1 additional hamburger: his marginal rate of substitution of
hamburgers for lemonade at point A is therefore 5. At point D, the slope of the indif-
ference curve is 	2: at this level of consumption, Eric\u2019s marginal rate of substitution
is 2\u2014he would be willing to give up only two glasses of lemonade for an additional
hamburger.
This discussion suggests a clear relationship between the marginal rate of substi-
tution of x for y (denoted by MRSx, y) and the slope of the indifference curve. On a
graph with x on the horizontal axis and y on the vertical axis, MRSx, y at any point is
the negative of the slope of the indifference curve at that point.
We can also express the marginal rate of substitution for any basket as a ratio of
the marginal utilities of the goods in that basket. To see how, consider any specific bas-
ket on the indifference curve U0. Suppose the consumer changes the level of con-
sumption of x and y by \ufffdx and \ufffdy, respectively. The corresponding impact on utility
\ufffdU will be4
(3.4)
But it must be that \ufffdU \ufffd 0, because changes in x and y that move us along the indif-
ference curve U0 must keep utility unchanged. So 0 \ufffd MUx(\ufffdx)