Managerial Economics and Strategy, 2/e

Summary

Consumers maximize their utility (well-being) subject to constraints based on their income and the prices of goods.

1. Consumer Preferences. To predict consumers’ responses to changes in constraints, economists use a theory about individuals’ preferences. One way of summarizing a consumer’s preferences is with a family of indifference curves. An indifference curve consists of all bundles of goods that give the consumer a particular level of utility. On the basis of observations of consumers’ behavior, economists assume that consumers’ preferences have three properties: completeness, transitivity, and more is better (nonsatiation). Given these three assumptions, indifference curves have the following properties:

   • Consumers get more utility ...