Question

Within the theory of consumer choice, show how rationing can make a consumer be worse off. Be very explicit in your answer using both a graph and words.

Answer 1

Rationality is a phenomenon where a consumer makes choices based on his choices and selects the alternative that he prefers. A consumer does that in order to maximize his utility given all the product information available in the market.
But sometimes rationality makes consumers worse off. This could be because of some reasons like:

• Consumers just go after what everybody is doing.
• They go for the immediate satisfaction and don’t wait in order to be better off.
• Sometimes, they end up getting sacrificed rather than maximized.

The following graph will help you understand the case better.

Now consider that consumer would always choose the bundle on the highest indifference curves, given his budget constraint. A consumer will never prefer point B and point C because MRS at both the points is not apt i.e. it is greater/less than the slope of budget constraint. For example, at B, MRS is greater than the slope of budget constraint, thus in order to get one extra unit of good 1, the consumer will give up more of good 2 and vice versa in the case of point B. Substitution of goods over one another matters.

Thus, the optimal choice of any rational consumer will be point A on Indifference curve 2 (IC 2).

Therefore, a consumer would be worse off when he would substitute wrong amount of a good for another good. (more or less than required)