LO3: Solve a consumer choice problem with utility function for perfect substitutes.Ĥ.4 Policy example: The hybrid car tax credit and consumer choice LO2: Solve a consumer choice problem with the typical utility function.Ĥ.3 Corner solutions and kinked indifference curves What is your prediction about how consumers’ driving and gasoline purchasing behavior will change when their income increases or decreases? When the price of gasoline increases or decreases? What implications will these behavior changes have for the hybrid car tax credit policy?Ĥ.1 The consumer choice problem: maximizing utility As we will see shortly, consumers think about the income they have, and the relative prices of all the possible goods they could buy, and then choose among all of the possible bundle combinations that their budget can support.
This module is concerned with how each consumer picks the best affordable. There are many ways to fill a shopping basket – ending up with many different possible bundles of goods. Think about a consumer who goes grocery shopping. This is what we mean by utility maximization – choosing the affordable bundle of goods and services that returns the highest utility. All of consumer theory in economics is based on the premise that each person will try to do his or her best given the money they have and the prices of the goods and services they like. For our policy example and in general, we address this question by combining the budget constraint with the concept of preferences and utility maximization.
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As we will see, this is simply a specific example of the general question we first raised in Module 1 of how to predict consumer behavior when prices or incomes change. We are now very close to being able to predict how consumers will change their driving and gasoline purchases in response to a government tax credit on hybrid cars. We are using the tools of microeconomic consumer theory to study this policy and assess the effectiveness of this policy in reducing emissions. government offered a tax credit toward the purchase of hybrid cars with the goal of reducing the amount of carbon emissions U.S.
The P olicy Q uestion : Hybrid Car Purchase Tax Credit -Is it the Best Choice to Reduce Fuel Consumption and Carbon Emissions? Module 4: Consumer Choice “Fill ‘Er Up” by derekbruff is licensed under CC BY-NC 2.0
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