chp6_sum - CHAPTER 6 HOUSEHOLD BEHAVIOR CONSUMER CHOICE The...

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CHAPTER 6 HOUSEHOLD BEHAVIOR & CONSUMER CHOICE The Budget Constraint The consumption choices made by households depends upon their consumption possibilities as well as their preferences. Households have limited budgets, which means they must choose between affordable combinations of goods and services. A budget constraint , illustrated in the figure, shows feasible combinations of items you can purchase given your income and the prices of the goods. The household can buy any combination of sodas and movies that lies on or within the budget line. A relative price is the price of one good divided by the price of another good. Opportunity cost is determined by relative prices. ( P M /P S ) gives the opportunity cost of a movie in terms of sodas forgone. When the price of the good measured along the horizontal axis (movies) changes, the budget line rotates around the vertical intercept. If the price of the good falls, the budget line rotates outward and becomes flatter; if the price of the good rises, the budget line rotates inward and becomes
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chp6_sum - CHAPTER 6 HOUSEHOLD BEHAVIOR CONSUMER CHOICE The...

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