Chapter Outline

The rational choice model can illuminate many policy questions.
1. A gasoline tax with a rebate can achieve a reduction in oil consumption without seriously hurting welfare.
2. Providing school vouchers to parents could increase expenditures on education, but increase the cost of attaining a given standard of education.
Consumer surplus measures the total benefit consumers receive from a commodity minus their cost of purchasing the item.
Indifference theory helps to make overall welfare comparisons.
1. Changes in housing prices can increase consumer welfare.
2. The consumer price index is an upwardly biased price index.
Price elasticity is one of the most useful concepts in consumer theory.
1. The TTC fare hikes increased total revenues, but demonstrate some pitfalls in measuring elasticity
2. The demand for alcohol is more elastic than is often thought.
Intertemporal choice models help to analyze behaviour over time.
An intertemporal budget constraint shows what consumption options are available between the present and future.
1. Variations in the time when income is received and in the interest influence the location of the budget constraint.
2. The constraint can be used to determine the future value of present income or the present value of future income.
Intertemporal indifference curves show the marginal rate of time preference of the consumer.
Optimal intertemporal allocation occurs when the intertemporal indifference curve and the intertemporal budget constraint are tangent.
1. Altering the interest rate will generally change the timing of consumption expenditures.
2. The permanent income hypothesis is illuminated by the finding of rational choice models, which show that increases in present income will be spent only partially in the present.
Numerous factors account for differences in time preference, including people's varying estimates of
1. the uncertainty of the world,
2. the desirability of a rising standard of living,
3. their position in the community and the hope of increasing that position, and
4. their ability to live up to their commitments.
(Appendix) Consumer surplus can be measured using indifference curves.
(Appendix) The Laspeyres and Paasche price indexes are biased price indexes, while the Divisia is an theoretically exact but impractical price index.

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