consumer theory 1

# consumer theory 1 - 1 Budget Constraints • Σ i p i q i =...

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Unformatted text preview: 1 Budget Constraints • Σ i p i q i = I • Simplifying assumption: two goods • p 1 q 1 + p 2 q 2 = I • Budget Line: shows limits to household’s consumption Budget Line (graphically) p 1 q 1 + p 2 q 2 = I p 2 q 2 = - p 1 q 1 + I q 2 = - (p 1 /p 2 )q 1 + I/p 2 I/p 2 I/p 1 q 2 q 1 slope = - (p 1 /p 2 ) Slope = OC of good 1 in terms of good 2. To get one more unit of good 1, we need p 1 dollars, so we sell p 1 /p 2 of good 2. Budget Constraints: Example • Suppose I want to become the ultimate fighting machine. • I have \$10. (I = 10) • My friend says he’ll make me a pair of nunchucks for \$2, or a bo staff for \$1. • q 1 = number of nunchucks, p 1 = 2 • q 2 = number of bo staffs, p 2 = 1 • How many bo staffs and pairs of nunchucks can I afford? (N,B) : e.g. (1,8) (2.5,5) (4,2) Budget Line Nunchuks Bo Staff 5 10 Unaffordable Slope=-2 Affordable • (1,8) • (2.5,5) Change in Income I/p 2 I/p 1 q 2 q 1 slope = - (p 1 /p 2 ) I ′ /p 2 I ′ /p 1 I increases to I ′ Change in Price I/p 2 I/p 1 q 2 q 1 slope = - (p 1 ′ /p 2 ) I/p 1 ′ p 1...
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## This note was uploaded on 04/13/2008 for the course ECON 1 taught by Professor Tang during the Spring '08 term at UCSD.

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consumer theory 1 - 1 Budget Constraints • Σ i p i q i =...

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