Consider an individual who consumes two goods, say good x and good y. The individual is a price taker in both markets. He pays pr dollars per unit of good x and py dollars per unit of good y. The individual can spend at most m dollars on the consumption of these goods. We consider an impulsive consumer who acts as if he chooses consumption bundles randomly without recourse to a preference system or utility function.
1. Can you determine the consumption bundle of a single impulsive consumer who spends his entire income on the consumption of good x and good y? Explain clearly why or why not.
2. Suppose now that there are N impulsive consumers who spend their entire (identical) incomes on the consumption of good x and good y. Can you determine the market demand for each good? What is the relationship between demand for each good and the price paid for it? Does the Law of Demand hold?
3. One might argue that a greater level of irrationality requires that consumers be allowed to spend less than their entire income on both goods. Can you determine the consumption bundle of a single impulsive consumer if he is not required to spend his entire income?
4. Suppose now that there are N impulsive consumers who are not required to spend all their (identical) income on the consumption of good x and consumption of good y. Can you determine the market demand for each good? What is the relationship between demand for each good and the price paid for it? Does the Law of Demand hold in this case?
5. What do these examples tell you about the importance of preferences and purposive behavior? Please limit your answer to 10 sentences.
6. Other than choosing random points on their budget constraint or in their budget set, can you think of an alternative approach to irrational consumer behavior? Under your assumptions, can you determine the consumption bundle of a single consumer? Why or why not? Can you determine market demand? Will the law of demand hold?
