Temple University
Economics 201

Microeconomics and Behavior

Chapter 3
Rational Consumer Choice

There are two principal parts of the chapter
A. Three Steps in Consumer Choice
 1. The Opportunity Set or Budget Constraint
 2. Consumer Preferences
 3. The Best Feasible Bundle

B. Applications

A.1. The Opportunity Set, Consumption Possibility Set, Budget Constraint

        i. Two Goods: M = P_sS + P_fF
            a. Effect of a change in income
            b. Effect of a change in price

        iii. 'All Other Goods' on the vertical axis

        iii. Kinks in the budget constraint
                a. Electricity rates
                b. Grant in income
                c. Food stamps

A.2. Consumer Preferences

        i. Axioms of Consumer Choice
            a. Preferences are complete
            b. More is preferred to less
            c. Preferences are transitive and reflexive
            d. Preferences are convex

        ii. Indifference curves
            a. Bundles between which consumer is indifferent
            b. Everywhere dense
            c. Downward sloping: Slope = MRS
            d. Convex
            e. Don't cross

        iii. Special Cases of Indifference Curves
            a. Perfect substitutes
            b. Fixed proportions
            c. Indifference to more of one good
            d. Goods and bads

A.3. The Best Feasible Bundle

        i. Budget Constraint & Indifference Curves
        ii. MRS & Price Ratio

B. Applications

        i. Utility Pricing
        ii. Food Stamps Again