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Econ 281 Chapter4a - Chapter 4 Consumer Choice People cant...

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1 Chapter 4 - Consumer Choice People can’t have everything; their choices are always constrained by factors such as time and money. In this chapter we will cover: The budget constraint Shifts in the budget constraint Maximizing Utility Minimizing Expenditure Revealed Preferences
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2 The Budget Line In reality, if an individual only consumes 2 goods or services (X and Y), their consumption is affected by 3 exogenous variables: The price of X The price of Y Income
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3 Price of x: P x  ;  Price of y: P y               Income:    I Total expenditure on basket (X,Y):  P x X + P y Assume only two goods available: X and Y The Basket is Affordable if total expenditure  does not exceed total Income: P X X + P Y  I
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4 The set of baskets that are affordable is the  consumer’s BUDGET SET The  BUDGET CONSTRAINT defines the set of  baskets that the consumer may purchase given  the income available: P x X+P y Y=I  The BUDGET LINE is the set of baskets that are  just affordable: Y=I/P y -(P x /P y )X
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5 Two goods available: X and Y I = $10 P x
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