1. MICROECONOMICS: Theory & Applications Chapter 5 Using Consumer Choice Theory
By Edgar K. Browning & Mark A. Zupan
John Wiley & Sons, Inc.
9th Edition, copyright 2006
PowerPoint prepared by Della L. Sue, Marist College

2. Learning Objectives
Determine how an excise subsidy affects consumer welfare and why it results in a deadweight loss.
Examine how the public provision of a certain quantity of a good such as education may lead to less consumption of the good.
Analyze how a voucher program would affect the quantity of educational services chosen by parents for their children.
(continued)
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3. Learning Objectives (continued)
Explore the impact of per-bag charges versus a fixed annual fee on the amount of trash generated by a community, recycling, and household welfare.
Develop an intertemporal model that illuminates the consumer’s choice to save or borrow and shows how changes in endowment and the interest rate affect that choice.
Understand how the theory of consumer choice can explain what types of financial assets an individual intent on saving for the future should purchase, or invest in.
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4. Excise Subsidies, Health Care, and Consumer Welfare
Excise subsidy – a form of subsidy in which the government pays part of the per-unit price of a good and allows consumers to purchase as many units as desired at the subsidized price
Lump-sum transfer – a form of subsidy in which the government gives the consumer a cash grant to be spent in any way the recipient wants
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5. Excise Versus Lump-Sum Subsidy [Figure 5.1]
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6. Using the Consumer Surplus Approach
Deadweight loss – a measure of the loss in well-being resulting (in this case) from the use of an excise subsidy
Figure 5.2
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7. Subsidizing Consumption
The government has two ways to subsidize consumption:
Reduce the price
Provide a particular quantity of the good or service at a price below the market price
Examples:
Education
Garbage disposal
The Consumer’s Choice to Save or Borrow
Investor Choice
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8. Public Schools and the Voucher Proposal [Figure 5.3]
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9. Consumer Choice: Garbage Disposal [Figure 5.4]
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10. Trash Disposal: The Bag System [Figure 5.5]
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11. The Consumer’s Choice to Save or Borrow [Figure 5.6]
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12. Effect of a Change in Endowment on Saving or Borrowing [Figure 5.7]
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13. Effect of a Change in Interest Rate on Saving or Borrowing [Figure 5
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14. Investor Choice - Terminology
Expected return – the summed value of each possible rate of return weighted by its probability
Expected utility – the summed value of each possible utility weighted by its probability
(Continued)
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15. Investor Choice – Terminology (continued)
Risk averse – a state of preferring a certain return to an uncertain prospect that generates the same expected return
Risk neutral – a state of deriving the same utility from a certain return as from an uncertain prospect generating the same expected return
Risk loving – a state of deriving less utility from a certain return than from an uncertain prospect generating the same expected return
Insurance – an arrangement by which the consumer pays a premium in return for the promise that the insurer will provide compensation for losses due to misfortune
Diversification – investing a given amount of resources in numerous independent projects instead of a single project in order to minimize exposure to risk
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16. The Return-Risk Tradeoff [Figure 5.10]
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17. Investor Preferences and Risk [Figure 5.12]
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18. Minimizing Exposure to Risk [Figure 5.13]
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19. Copyright 2006 John Wiley & Sons, Inc. All rights reserved
Copyright 2006 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in section 117 of the 1976 United States Copyright Act without express permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information herein.
John Wiley & Sons, Inc.
Copyright 2006