PAM_2000_Spring_2009_Lecture_7

PAM_2000_Spring_2009_Lecture_7 - PAM 2000 Lecture 7 Agenda...

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PAM 2000 Lecture 7 Agenda: Budget constraint Shifts in budget line Consumer equilibrium Corner solutions

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Budget Line or Budget Constraint We have showed what consumer wants Now show what the consumer can afford to buy 2 things determine the budget constraint: Income (Y) Price of goods (P b and P z )
Budget Line or Budget Constraint  (con’t) If Lisa spends all her income on burritos and pizza, then her budget constraint is: P b Q b + P z Q z = Y This says, along a budget line, expenditures = income Expenditures on Burritos: P b Q b Expenditures on Pizza: P z Q z

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Budget Line or Budget Constraint  (con’t) How many burritos can Lisa buy? Q b = (Y - P z Q z )/P b So she can buy more burritos : the higher is Y the lower is P b the fewer pizza she buys If she has one more dollar, she can buy 1/P b more units of burritos
Budget Line or Budget Constraint  (con’t) Same thing for pizza If she spends all income on burritos (no pizza), then Q b = Y/P b For pizza: Q z =Y/P p These give the endpoints of her budget line Slope is rise/run = Y/P b /Y/P z = P z /P b , or the ratio of prices, or “relative prices”

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