Solution To Selected Questions: Chapter 3 Consumer Behavior Worksheet - Chairat Aemkulwat, 2015

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Chulalongkorn University: BBA International Program, Faculty of Commerce and
Accountancy
2900111 (Section 1)
Chairat Aemkulwat
Economics I: Microeconomics
Spring 2015
Solution to Selected Questions: CHAPTER 3
CONSUMER BEHAVIOR
Questions for Review
9. Upon merging with the West German economy, East German consumers indicated a
preference for Mercedes-Benz automobiles over Volkswagens. However, when they
converted their savings into deutsche marks, they flocked to Volkswagen dealerships.
How can you explain this apparent paradox?
There is no paradox. Preferences do not involve prices, and East German
consumers preferred Mercedes based solely on product characteristics.
However, Mercedes prices are considerably higher than Volkswagen prices. So,
even though East German consumers preferred a Mercedes to a Volkswagen,
they either could not afford a Mercedes or they preferred a bundle of other
goods plus a Volkswagen to a Mercedes alone. While the marginal utility of
consuming a Mercedes exceeded the marginal utility of consuming a
Volkswagen, East German consumers considered the marginal utility per dollar
for each good and, for most of them, the marginal utility per dollar was higher
for Volkswagens. As a result, they flocked to Volkswagen dealerships to buy
VWs.
Exercises
2. Draw indifference curves that represent the following individuals’ preferences for
hamburgers and soft drinks.
Indicate the direction in which the individuals’
satisfaction (or utility) is increasing.
a. Joe has convex preferences and dislikes both hamburgers and soft drinks.
Since Joe dislikes both goods, he prefers
Hamburgers
less to more, and his satisfaction is
increasing in the direction of the origin.
Convexity of preferences implies his
indifference curves will have the normal
shape in that they are bowed towards the
direction of increasing satisfaction.
Convexity also implies that given any
two bundles between which the Joe is
indifferent, any linear combination of
Soft Drinks
the two bundles will be in the preferred
set, or will leave him at least as well off. This is true of the indifference curves
shown in the diagram.
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