Consumption Country pct GDP amount

Australia 61.9 21240 13147

Banglad. 67.3 1590 1070

Brazil 61.9 7300 4519

Canada 56.7 20000 11340

Egypt 74.2 1270 942

Germany 57.8 24920 14403

Japan 62.4 33780 21078

Thailand 56.1 2110 1183

U.K. 65.8 22790 14995

U.S. 67.8 34100 23119

CountryGDP per Capita

Health Expenditure per Capita

Life Expect.

AverageYears in Poor Health

Preval-ence of HIV

Albania 3600 144 72 9.4 0.01

Bangladesh 1590 57 61 8.2 0.02

Brazil 7300 482 67 8.4 0.57

China 3920 176 70 7.4 0.07

Ethiopia 660 27 42 8.6 10.63

Germany 24920 2642 77 6.5 0.10

Nigeria 800 22 47 11.5 5.06

Russian Fed. 8010 368 66 6.6 0.18

United States

34100 4433 77 6.9 0.61

Source: World Bank website, http://www.worldbank.org/data/databytopic/class.htm, on April 29, 2002.Notes: GDP (for 2000) is via the purchasing power parity method; health care expenditures per capita were found by applying the 1990-98 average percentage of GDP spent on health care; life expectancy is estimated from birth; years spent in poor health and HIV are World Bank health risk indicators; HIV figures represent the percent of adults estimated to carry the virus.

Indifference Curve Analysis

1. Develop indifference curves 2. Develop budget constraint 3. Some basic analysis: a. changes in prices; b. changes in income; c. the Engels Curve 4. The Food Stamps Problem

Indifference curve:

A collection of points for which the consumer is indifference between each of them and some reference point.

Typically shown in the context of a two good world on a two-dimensional graph.

.A

.E

.F

.B

C

.D

O G

Fo o d

Ind iffe re nc e c urve

Wha t se nse d o e s the ind iffe re nc e c urve m a ke ? A he uristic a p p ro a c h.

O G

Fo o d

Th e c o nsum e r’s p re fe re nc e m a p isthe se t o f a ll h is ind iffe re n c e c urve s.He re se ve ra l m o re a re sho wn

Determinants of Consumer Preferences

Experience Demonstration effects Advertising Conspicuous consumption

The axiomatic approach to indifference curves is a search for a minimum set of assumptions regarding consumer behavior through which to generate indifference curves.

Standard axioms:

1. More is preferred to less—nonsatiation2. Completeness—all points in a relation3. Transitivity– A B; B C; A C

Fo o d

O g

U1

U2

A.

B. C

Why ind iffe re nc e c urve s c a nno t c ro ss (a nd still o b e y the a xio m s fo r p re fe re nc e s).

.

The marginal rate of substitution and the shapes and kinds of indifference curves.

Perfect substitutes Perfect complements Steepness, what does it mean Do they shift or stay in place?

A

B

U1

U1

O G

Food

The a xio m s im p ly tha t ind iffe re nc ec urve s m ust b e unb ro ke n, iec o ntinuo us.

These two sets of indifference curves represent people who differ in their relative willingness to trade food for medicine. Which one is hungry? Careful.

The budget equation:

B = pogOG + pfF

OG = B/pog – pf/pogF

Meaning: The budget equation will depict a curve in OG-Food space that is downward sloping (note: its derivative –pf/pog is negative).

O G

Fo o dB/p f

If b ud g e t is B, the n the m o st O G p o ssib le to b uy is B/p a nd sim ila rlythe m o st Fo o d p o ssib le is B/p . Theb ud g e t c o nstra int c o nne c ts the se two inte rc e p ts.

o ,

f

Bud g e t c o nstra int

O G

Fo o dA B C

As the p ric e o f Fo o d fa lls, the b ud g e tc o nstra int sh ifts fro m A to B a nd the nto C .

O G

Fo o dA B C

As inc o m e inc re a se s, the b ud g e tc o nstra int shifts o utwa rd p a ra lle ly

. E

UE

Food

O G

Bud g et line

C o nsum e r e q uilib riumin ind iffe re nc e c urve a na lysis

Utility, a quantitative measure of satisfaction.

a. utility is constant along an indifference curve.

A

.E

.F

.B

C

D

O G

Fo o d

Ind iffe re nc e c urve

Wha t se nse d o e s the ind iffe re nc e c urve m a ke ? A he uristic a p p ro a c h.

b. higher indifference curves yield higher utility.

c. utility is treated as ordinal in most cases

“ordinal” measures are like 1st, 2nd, 3rd, etc

“cardinal” numbers are like 1.0, 3.6, 7.1 etc

(utility numbers are really “cardinal but arbitrary”)

Jeremy Bentham and Utilitarianism

1748-1832.

For Bentham, utility was:

1. Metric (also called Cardinal, remember--today we think its ordinal).

2. Interpersonally comparable.

Bentham was extremely optimistic in these beliefs.

If utility were metric, then society could correctly identify and measure exactly how happy or well-off America was, or Detroit, or this classroom. It would be scientific.

Nevertheless his utilitarianism proved useful in bringing reforms:

1. Prisons were made more humane.

2. Insane asylums were made more humane.

Who was Jeremy Bentham? And, what does he look like?

Notice I said "what does he look like.

Note: Although Bentham lived and wrote back in the 18th Century you can see what he looks like. Notice I said he.

JeremyBenthamas he stillappears in aglass case inUniversityCollege ofLondon, whichhe helped tofound.

Applying calculus to find an expression for the slope of the other curve, the indifference curve:

OG/F = - (U/F) /(U/OG)

or, using an equivalent notation:

OG/F = - MUf/ MUog

. E

UE

Food

O G

Bud g et line

C o nsum e r e q uilib riumin ind iffe re nc e c urve a na lysis

At an equilibrium, tangency implies that the slope of the budget constraint equals the slope of the indifference curve: Hence,

Consumer equilibrium requires that

pf/pog = MUf /MUog

or

MUf /pf = MUog /pog

In words: The marginal utility per dollar of expenditure must be equal for each good.

..

. E3E2

E1

Fo o d

O G

F1 F3

As inc o m e inc re a se s, Fo o d d e m a nd e dinc re a se s. This is sho wn in ind iffe re nc ec urve a na lysis a s suc c e ssive , ne we q uilib ria .

Eng e l’s C urve

Fo o d

Inc o m e

F1 F 2F 3

C o nsid e r the sha p e o f the Eng e lsC urve a s re la te d to the inc o m ee la stic ity o f d e m a nd .

O G

Fo o d

AB

C D0

Whe n the e lig ib le p e rso n is g ive n ABwo rth o f Fo o d Sta m p s, this e xte nd she r b ud g e c o nstra int to ABD.

Fo o d Sta m p s Pro b le m b ud g e t c o nstra int

O G

Fo o d

AB

C D0

Fo o d Sta m p s Pro b le m b ud g e t c o nstra int

..

EE’

A c a se o f a Fo o d Sta m p sre c ip ie nt fo r who m the Sta m p sc o uld just a s we ll ha ve b e e n in c a sh (ra the r tha n “in-kind ”).

O G

Fo o d

A B

C D0

Fo o d Sta m p s Pro b le m b ud g e t c o nstra int

A c a se o f a Fo o d Sta m p sre c ip ie nt fo r who m the Sta m p sc o uld just a s we ll ha ve b e e n in c a sh (ra the r tha n “in-kind ”).

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UFSta m p s

U c a sh

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