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Class02_15

# Class02_15 - Class Notes(cover part of Chapter 7 in the...

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02/15/2008 Class Notes (cover part of Chapter 7 in the textbook) Class Outline Consumption Possibilities Preference and Utility Consumption Possibilities Consumer’s objective : Max (Total) Utility subject to (s.t., henceforth) budget constraint . Def. Total Utility Total utility is the total benefit a person gets from the consumption of goods or services. Def. Budget Constraint (Budget Line) The budget constraint is the boundary between the consumption possibilities that are affordable and those that are not given the goods’ prices and consumer’s income. Suppose there are only 2 goods: Donuts (D) and Beers (B) Let I income, q D quantity of donuts, q B quantity of beers, p D price per donut, p B price per beer; Then consumers can afford all the consumption bundles such that: { ' Total Expenditure on Beer Total Expenditure on Donuts * * B B D D Consumer s Income I q p q p D + 1 2 3 14 2 43 The Budget line is then: * * B B D D I q p q p = + * D B D B B p I q q p p = -

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Example : Suppose Peter has I=\$30, and p D = \$6, p
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