Budget - MEC 290 Microeconomics The Budget Constraint...

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1 MEC 290 Microeconomics The Budget Constraint Introduction In order to understand how consumers make choices, need to be clear about 1. Constraints : What choices are available? Two aspects: Physical constraints Cannot study more than 24 hours/day. Cannot consume -1 oranges. Economic constraints Consumers are assumed to pay the market price. Can only spend resources you have (e.g., any borrowing must be fully collateralized). 2. Preferences : How consumers evaluate the available choices. Intro., cont’d • Last time we explored consumer preferences: – Preference ordering, indifference curves and marginal rate of substitution. – Utility function, marginal utility, and marginal rate of substitution. • Now turn to the constraints, primarily the resource constraint or “budget”.
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2 Resource constraint • The bundles available to a consumer were assumed non-negative and divisible -- physical constraints. x y Every ( x,y ) in this quadrant is available. • But there are also economic constraints. Economic constraint – the budget
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Budget - MEC 290 Microeconomics The Budget Constraint...

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