Ch08-Lecture+Notes

# Ch08-Lecture+Notes - Consumption Bundles and Budget Line A...

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Consumption Bundles and Budget Line A bundle of goods , or a consumption bundle , is a list that shows quantities of each (and every) good that a consumer is (potentially) interested in consuming. Some consumption bundles are affordable , some are unaffordable Whether a consumption bundle is affordable or not depends on Income of the consumer Prices of the goods. Illustration - The World with Two Goods: Tim consumes only two goods, peanuts (sold by LBs) and soda (sold in fluid ounces). Tim’s has \$40/week to spend on the two goods. Peanuts cost \$4.00 per pound. Soda costs \$0.10 per ounce. A consumption bundle for Tim is represented by a pair of numbers ( 𝑥 , 𝑦 ) where 𝑥 is the amount of peanuts and 𝑦 is the amount of soda (per week). A bundle ( 𝑥 , 𝑦 ) costs 4 𝑥 + 0.1 𝑦 dollars. So ( 𝑥 , 𝑦 ) is affordable to Tim if 4 𝑥 + 0.1 𝑦 ≤ 40. If 4 𝑥 + 0.1 𝑦 > 40 , then ( 𝑥 , 𝑦 ) is not affordable to Tim. For example, (4,250) is affordable, but (8,150) is unaffordable to Tim. Consumption bundles (2,320) and (6,160) cost exactly Tim’s income \$40. Peanuts (lb.) Soda (fl.oz.) 4 200 8 150 2 6 160 320 affordable unaffordable affordable & costs exactly Tim’s income

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If you connect all the consumption bundles that cost exactly \$40, you’d get Tim’s budget line . It is a straight line because a bundle ( 𝑥 , 𝑦 ) costs exactly \$40 if 4 𝑥 + 0.1 𝑦 = 40. This is same as 𝑦 = 4 0.1 𝑥 + 40 0.1 .
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