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2010 post-6b

# 2010 post-6b - II The Budget A The Budget Equation B = PxX...

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II. The Budget A. The Budget Equation: B = P x ∙X + P y ∙Y + P z ∙Z + ….. B. The Budget Line: Y = B/P y – P x /P y ∙X Example: Kirk has \$60 to spend on jalapenos and bacon. The price of jalapenos is \$3/lb. and the price of bacon is \$2/lb. Bacon B/P b = 30 B/P j = 20 Jalapenos 1. Suppose the price of bacon falls to \$1.50. Now Kirk can buy a maximum of 60/1.5 = 40 pounds of bacon. The budget line will rotate because the price ratio has changed (the slope has changed).

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Bacon B/P b = 40 B/P j = 20 Jalapenos 2. Suppose instead of the drop in the price of bacon (so P b is still \$2), the amount Kirk has to spend on the two goods rises to \$90. Here, Kirk can buy more of both goods, so the budget line has a parallel shift out. Bacon B/P b = 45 B/P j = 30 Jalapenos
3. Now suppose that instead of the increase in budget, the prices of both goods fall. The price of bacon falls to \$1.33333 and the price of jalapenos falls to \$2. Here, Kirk can buy more of both goods, and the budget line shifts out in the same manner as before.

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