Theory of Consumer Behavior and Optimal Choice - Free Samples

Question: Discuss about the case study of Theory of Consumer Behavior and Optimal Choice. Answer: Introduction: By virtue of the theory of consumer behavior the optimal choice of bundle depends on the equilibrium obtained from utility maximization subject to the budget constraint. The figure below shows optimal choice of Doreens family between childcare service and remaining other goods. In the above figure consumption of childcare service is measured on the horizontal axis while remaining other goods are measured in vertical axis. Given that, the familys current income is $60,000. The family does not spend more than half of their income on consumption of child care service management. This put a restriction on the budget line as shown from the kink of the budget line, MNO. The kink implies the family is spending exactly half of their income on childcare and half on the other goods[1]. The family is currently spending $10,000 for childcare. The amount spend on other goods is therefore ($60,000-$10,000) = $50,000. The point of equilibrium is at e where the indifference curve I1 is tangent to the budget line MNO. The equilibrium bundle of goods is given as (10000, 50000). A subsidy of 85% on total cost of subsidies implies that the family can now consume more of health care services at the given income. Imposition of subsidy shifts the budget line from MNO to MNO. The family now needs to pay only 15% of childcare cost[2]. The rest that is 85% or additional 8500 can be spent on other goods. Total spending on other goods is now ($50,000 + $8,500) = $58,000. The equilibrium is now shifted to e1 with optimum bundle of (10000, 58500). In any consumption choice price plays an important role. The choice between dinning out to a restaurant and dining in home significantly influenced by increasing cost of dinning at restaurant[3]. As mentioned in the article the cost of eating at restaurant has increased by 2.4 percent while the same at home decreased by 2.2% in this year. The change in price leads to a price effect which in turn causes the optimal consumption choice to change. In figure 3, the horizontal and vertical axis measures good in home (X) and food at restaurant (Y) respectively. AB is the initial budget line. The utility level of consumer is indicated by the initial indifferent curve I1. Suppose initially the price of X is P1. Given the price and budget constraint, equilibrium is indicated by the point E with optimal consumption of X and Y being X1 and Y1 respectively. Consider now the home price declines to P2. This makes a pivotal shift of the budget line towards X axis from AB to AB1. E2 is the new equilibrium, corresponds to a higher indifference curve I2. The optimal consumption choice for X now increases to X1 while that for Y decreases to Y2. This in known as the price effect[4]. To understand the price effect in terms of joint impact of income and substitution effect an artificial budget line parallel to new budget line has drawn. This budget line is tangent to I1 at the point E1. The magnitude of substitution effect is the shift from E to E1 while that of income effect is from E1 to E2. The workers choice between leisure and working hours are modeled in framework of labor and leisure. This is same as indifference curve analysis for two consumption goods. The budget constrain is the wage line while utility of consumers is modeled with the indifference curve. When there is an increases in tax rate, then the effective wage to workers reduces. This implies for each additional work effort the workers get a lower effective wage. This in turn means leisure now becomes cheaper as worker have to forgo a lower amount of wage[5]. This encourages workers to substitute more work hours with leisure. This is the substitution effect of increased tax rate. The substitution effect always increases leisure over work effort. There is another effect on taxes, which is the income effect. The lower wage reduces purchasing power of people. Therefore, to keep the level of utility at a certain level workers need to work more hours[6]. The income effect therefore has a positive influence on working hours. An increases in tax rate therefore has two opposite effect on work hours. If substitution effect dominates then working hours decreases while if income effect dominates then working hours increases. The two cases are described below. WT is the initial wage line with equilibrium at E1. An increase in the tax rate shifts the wage line from WT to W1T. In figure 4, substitution effect dominates and hence work hours reduces from TH1 to TH2. Opposite is the case in figure 5. The substitution of manual labor with a process called automation put has made laborers to live with the anxiety of losing jobs. The threat was initially limited only to manual workers. However, the advent of more advanced technology now substitute informative works as well. With this the earlier concern for job type of whether white collar or manual has now shifted to routine or non-routine jobs. As mentioned in the article, in America nearly 47 percent are under pressure of job loss from automation. The class of workers more vulnerable to the substitution by automation include logistics jobs and that in transportation including delivery service or taxi drivers[7]. The potential job profiles in office support program (receptionist, security guards and the like) are suffering from automation employed in offices. The technique of automation quickly substitutes manual workings of office clerk, that of telemarketers and accountants. People engaged in this jobs are more exposed to losing jobs in adaptation of computerization. The opportunity of finding jobs in new industry has also become limited with advanced training program guided by machine learning process[8]. The modern automation techniques in addition to threating jobs in development of software affects jobs in sectors like health care, works in administrative departments and such others. The reliance on artificial intelligence associated with fifth generation computers has now become a growing trend. Sectors adapting artificial intelligence possess high dangers of losing jobs. The other vulnerable sectors include sales agents in real estate, typist, technical writers and word processing jobs. Reference list Automation And Anxiety' (The Economist, 2018) https://www.economist.com/news/special-report/21700758-will-smarter-machines-cause-mass-unemployment-automation-and-anxiety accessed 20 March 2018 'Changes To The Child Care Rebate System' (NewsComAu, 2018) https://www.news.com.au/lifestyle/parenting/what-the-child-care-changes-mean-for-you/news-story/75447014c6e02d23f2b6aec34711e5d9 accessed 20 March 2018 Cowen, Tyler, and Alex Tabarrok.Modern Principles of Microeconomics. Palgrave Macmillan, 2015. 'Forbes Welcome' (Forbes.com, 2018) https://www.forbes.com/sites/daniellemarceau/2016/11/22/low-food-costs-oversupply-and-changing-consumer-preferences-spell-bad-news-for-restaurant-industry/#7ef7bd177e72 accessed 20 March 2018 Maurice, S. Charles, and Christopher Thomas.Managerial Economics. McGraw-Hill Higher Education, 2015. Nicholson, Walter, and Christopher M. Snyder.Intermediate microeconomics and its application. Cengage Learning, 2014. Rader, Trout.Theory of microeconomics. Academic Press, 2014. 'Supply-Side Guru Arthur Laffer Hails TrumpS Tax Policy' (Ft.com, 2018) https://www.ft.com/content/8cb63288-bc85-11e6-8b45-b8b81dd5d080 accessed 20 March 2018.