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Chapter 21 HMWK

This is a complicated chapter.  What did you find most confusing?  What do you think about the concept of indifference curves in the context of budget constraints?
Does the concept of indifference curves add to your understanding of demand curves?  The existence of prices and income clearly leads to budget constraints.  Do you think about trade-offs for large purchases (ie a car payment versus rent/mortgage)?  How about small purchases?  Does timing matter (probably you aren't purchasing both a car and a house at the same time)?  How does the concept of indifference curves inform your thinking about purchases?




Indifference curves help me visualize the optimal levels in the trade-off between two choices. But there is still much room for ambiguity depending on consumer preferences, influenced by whether the income effect or substitution effect is greater. Although the graphs helped me see how the changing prices affected the outcome, I had to read through the mathematical reasoning several times and still probably couldn't explain the equations. But from my own consumer behavior I could relate to the thought process.

I tend to think about trade-offs more for larger purchases. I'd rather have a car loan than a mortgage because I value having less financial obligations and more flexibility. While the difference between a car loan of $200/mo and $250/mo wouldn't cause me any hardship, after 5 years it could greatly influence the amount I'm able to save for a vacation. So I'd probably go for the smaller loan because I value travel.

For smaller purchases, sometimes I think about trade-offs when buying bulk food. Even though a 10 pound bag of rice costs more upfront and takes away the opportunity to be able to use that money to enjoy other things right now, I know that in the long run I will spend less money per ounce and overall will have more to spend later.

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