PAM 200 8.29 Notes - Wine per beer=.5($2/$4 What happens if...

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8/29/07 PAM 200 1 Dimensional Budget Constraint 2 Dimensional Budget Constraint The graph above is called a: 1) Budget Constraint 2) Production Possibilities Frontier (PPF) 3) Transformation Function
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Opportunity Costs make up the graph The slope of a budget constraint measures the trade-offs between two goods (the opportunity cost of the Y-Axis?) Slope is change in Y over change in X (change in learning/change in enjoyment) Budget Constraint in a Market Ex. Let 1 glass of wine be $4 and 1 glass of beer be $2
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Unformatted text preview: Wine per beer=.5 ($2/$4) What happens if all prices double and income doubles: Price doubles- shift down in the ppf Income doubles- shift upward in the ppf Therefore the graph remains the same (graph shows quantity) but price has changed (can not be shown by this graph) Increase in funding for one item on a 2 item ppf curve Mathematics of Budget Constraints Given income Y Two goods A and B Two prices Pa and Pb PaQa + PbQb = Y PaQa= Y – PbQb Qa= Y/Pa –Qb(Pb/Pa)...
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