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Ch.4 Notes

# Ch.4 Notes - Intermediate microeconomics Professor Yongmin...

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Intermediate microeconomics Professor Yongmin Chen Topic 3. Consumer Choice Budget Line Your ability to consume is limited by the income you have. This is called the budget constraint. Suppose there are only two goods, X, Y, and your income is M. Your budget constraint: p X X + p Y Y M Budget line: p X X + p Y Y = M. Slope of the budget line. Example. Suppose a consumer's budget line passes the point of Y = 30 on the vertical axis and X = 10 on the horizonal axis. The price of Good X is 3. What is the consumer's income? What is the price of Good Y? What is the equation for the budget line? What is the slope of the budget line? How will changes in income or price change the budget line? When will changes in both income and price leave the budget line unchanged? Maximizing Utility by the Consumer Now we are ready to find out how the consumer maximizes utility from consumption subject to budget constraint. Two cases: interior solution and corner solution. At an interior solution, the consumer chooses the consumption bundle at which her

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Ch.4 Notes - Intermediate microeconomics Professor Yongmin...

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