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Chapter 6 The Logic of Consumer Choice Schedule1 Schedule 2 Schedule 3 Schedule 4 Units of A TU Units of B TU Units of C TU Units of D TU 1 7 1 24 1 36 1 126 2 13 2 44 2 66 2 234 3 18 3 60 3 90 3 324 4 22 4 72 4 108 4 396 5 25 5 82 5 120 5 450 6 28 6 90 6 129 6 486 7 29 7 96 7 135 7 513 8 30 8 100 8 138 8 531 Do RATS understand the inverse relationship between price and quantity? • Choice between two liquids – Root beer – Collins mix • Given 300 pushes (each liquid had a different number of pushes to get it – price) • Found rats switched to the “cheaper” liquid when the “price” changed Why isn’t education and medical care free? • If cost = 0 when do we stop using it? • When MU = 0 • Thus we will see a lot of frivolous use of programs. It costs you nothing so use it. Consumer Surplus • The difference between the actual price buyers pay for a good and the maximum amount they are WILLING and ABLE to pay for it • Dollar measure of benefit gained from a price decrease Consumer Surplus cont. • Triangle under the demand curve and above the equilibrium price out to the equilibrium quantity Consumers' Surplus Part (a) Pric e Co ns ume rs ’ S urplus Windo w P S CS S $7 $5 $5 D 0 D 0 100 Quantity 50 100 Q Changes in Supply affect Consumer Surplus • Decrease in the number of sellers • Advance in technology • Increase in the price of relevant resources • A per-unit subsidy placed on producers/seller Consumers' Surplus Pric e S2 Part (b) Windo w A A S1 P2 P1 CS with S 1 : B C P1 C A CS with S 2 : P2 D1 0 Quantity B Sales schemes • Consumer is willing to buy – One pair of shorts for $40 – Second pair of shorts for $30 • Store has a choice – Sell shorts for $30 – Have sale where buy first for $40 get $10 off second pair? – Which has more CS??? (hint only use the demand curve) Consumers’ Surplus and Two Pricing Schemes Pric e Pric e A Bo b’s demand fo r pairs o f tro us e rs $40 $30 Pric e A ($30) F Cas e whe n e ac h pair o f ($40) C tro us e rs D is $30 ($30)F Cas e whe n firs t pair o f B tro us e rs D is $40 and E s e c o nd pair is $30 D 0 Pairs o f Tro us e rs D D 0 1 2 Pairs o f Tro us e rs (a) 0 2 (b) 1 Pairs o f Tro us e rs 2 (c ) Do we understand Chapter 6?? In-class exercise 6 Chapter 6 homework Numbers 3 and 4 Working with graphs and numbers 1, 3, 4 and 5