Q1. In this chapter, consumer prefer... [FREE SOLUTION]

Chapter 3: Q1. (page 128)

In this chapter, consumer preferences for various commodities did not change during the analysis. In some situations, however, preferences do change as consumption occurs. Discuss why and how preferences might change over time with the consumption of these two commodities:
a. cigarettes.
b. dinner for the first time at a restaurant with a special cuisine.

Short Answer

Expert verified

a. The consumer's preference for cigarettes will change over time due to relative changes in price and thus the real income.

b. The consumer's preference for dinner will change if other restaurants offer dinner at a lower cost. The change in relative price will shift the consumer's indifference curve accordingly.

Step by step solution

Consumer preferences, indifference curve, and the budget line

Consumer behavior theory begins with three basic assumptions about people's preferences for one market basket versus another. These are completeness, transitivity, and willingness to consume more. These three assumptions do not explain consumers' preferences, but they impose a degree of rationality and reasonableness on them.

An indifference curve represents all combinations of available market baskets, which gives an equal level of satisfaction.

A budget line represents all sets of goods for which the total amount of money spent equals income.

The consumer maximizes satisfaction if her market basket is located on the budget line and is the consumer's most preferred combination of goods and services.

Preference for cigarettes

The consumer's preference may change over time due to relative changes in the price of cigarettes. The relative change in cigarette price (say increase) will change the real income (decreases) so that the consumer prefers the less costly substitute goods over cigarettes.

Besides, cigarettes are luxury goods whose price elasticity of demand is highly elastic (compared to necessary and normal goods); that is, the quantity demanded changes more than proportionately for any small price change.

Thus, due to a fall in real income, the consumer's indifference curve shifts accordingly, and one can say that the consumer's preference has changed.

Preference for a first-time dinner at a restaurant

"A dinner for the first time in a restaurant with special cuisine" is again a luxury good whose price elasticity of demand is highly elastic. Any change in relative price, thereby real income, will significantly change the quantity demanded.

Thus, the consumer's market basket changes to either a higher or lower indifference curve depending on the increase or decrease in the real income. The consumer will prefer only that 'dinner' which lies on her budget line in due course of time.

If the dinner offered by another restaurant is cheaper, the consumer will prefer to dine in that restaurant. Here the third assumption of consumer preference applies, which is that "more is better than less." A consumer can get more food items if it is cheaper.