The Theory of Individual

Behavior
Chapter IV
By Ardian Safrul Fajar
 Applications Of Indifference Curve
Analysis
Choice By Consumers
Buy One Get One Free
- The “ Buy One , Get One Free “ marketing scheme is quite easy to
anlyzein our framework
Cash Gifts, In-Kind Gifts, and Gift Certificates

- Along with death and taxes, lines in refund departments after christmas appear to
be an unpleasant but necessary aspect of life .

- One christmas morning , a consumer named sam is in equilibrium , consuming

bundle
- While Sam Likes fruitcake and is better off after receiving

- Thus , a cash gift generally is preferred to an in - kind gift of equal value , unless
the in – kind gift is exactly what the consumer would have purchased personally

- One way stores attempt to reduce the number of gifts returned is to sell gift
certificates

- Graphically, the effect of receiving a gift certificatesat store

- The effect of gift certificates on consumer behavior depens , among other things
, on whether good is a normal or inferior good .
Choice by Workers and Managers
A simplified Model of Income – Leisure Choice

- Most workers view both leisure and income as goods and substitute between
them at a diminishing rate along an indifference curve .

- To induce workers to give up leisure , firms must compensate them .

- Worker behaviour this may be examined in much the same way we analyzed
consumer behavior
-The Decisions of Managers
- Suppose a managers preferences are such that she or he views the “ profits “
and the “ output “ of the firm to be “ goods “ so that more of each is preferred to
less .

- Show th relation between profits and the output of a firm on the curve labeled
” firm’s profits “ .

- Given this relationship between output and profits a manager who views
output and profit as “ goods ” has in indifference curves like those in .

- In contrast , when the manager’s preferences depend solely on output, the

indifference curves look like those in , which are vertical straight lines .

- Finally , Suppose the manager cares solely about the profits of the firm .
 The Relationship Between
Indifference Curve Analysis And
Demand Curves
Individual Demand
- To see where the demand curve for a normal good comes .
Market Demand
- You will usually , in your role as a manager , be interested in determining
the total demand by all consumers for your firm’s product .

- This concept is illustrated graphically in represent the individual demand

curves of twi hypothetical consumers .

- Thus , the demand curves we studied based on indifference curve anlysis