Did 9/11 Change Tastes?: In another textbook, the argument is made that consumer tastes over “airline miles traveled” and “other goods” changed as a result of the tragic events of
September 11, 2001.
A: Below we will see how you might think of that argument as true or false depending on how you model tastes.
(a) To see the reasoning behind the argument that tastes changed, draw a graph with “airline miles traveled” on the horizontal axis and “other goods” (denominated in dollars) on the vertical.
Draw one indifference curve from the map of indifference curves that represent a typical consumer’s tastes (and that satisfy our usual assumptions.)
(b) Pick a bundle on the indifference curve on your graph and denote it A. Given the perception of increased risk, what do you think happened to the typical consumer’s MRS at this point after September 11, 2001?
(c) For a consumer who perceives a greater risk of air travel after September 11, 2001, what is likely to be the relationship of the indifference curves from the old indifference map to the indifference curves from the new in difference map at every bundle?
(d)Within the context of the model we have developed so far, does this imply that the typical consumer’s tastes for air-travel have changed?
(e) Now suppose that we thought more comprehensively about the tastes of our consumer. In particular, suppose we add a third good that consumers care about — “air safety”. Imagine
a 3-dimensional graph, with “air miles traveled” on the horizontal axis and “other goods” on the vertical (as before)— and with “air safety” on the third axis coming out at you. Suppose
“air safety” can be expressed as a value between 0 and 100,with 0meaning certain death when one steps on an airplane and 100meaning no risk at all. Suppose that before 9/11, consumers thought that air safety stood at 90. On the slice of your 3-dimensional graph that holds air safety constant at 90, illustrate the pre-9/11 indifference curve that passes through (x A1 ,x A2 ), the level of air miles traveled (x A
1 ) And other goods consumed (x A
2 ) Before 9/11.
(f) Suppose the events of 9/11 cause air safety to fall to 80. Illustrate your post-9/11 indifference curve through (x A
1 x A
2) on the slice that holds air safety constant at 80 but draw that slice on top of the one you just drew in (e).
(g) Explain that, while you could argue that our tastes changed in our original model, in a bigger sense you could also argue that our tastes did not change after 9/11, only our circumstances did.
B. Suppose an average traveler’s tastes can be described by the utility function u(x1,x2,x3) = x1x3 + x2, where x1 is miles traveled by air, x2 is “other consumption” and x3 is an index of air safety that ranges from0 to 100.
(a) Calculate the MRS of other goods for airline miles—i.e. the MRS that represents the slope of the indifference curves when x1 is on the horizontal and x2 is on the vertical axis.
The MRS is
(b)What happens to the MRS when air safety (x3) falls from90 to 80?
(c) Is this consistent with your conclusions from part A? In the context of this model, have tastes changed?
(d) Suppose that u(x1,x2,x3) = x1x2x3 instead. Does the MRS of other consumption for air miles traveled still change as air safety changes? Is this likely to be a good model of tastes for analyzing what happened to consumer demand after 9/11?
(e) What if u(x1,x2,x3)= x2x3 +x1?