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ch8 - Chapter 8 Possibilities Preferences and Choices...

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Unformatted text preview: Chapter 8 Possibilities, Preferences, and Choices Consumption Possibilities • A household’s budget line describes the limits to its consumption choices. • Lisa has $30 a month to spend, the price of pop is $3 a six-pack, and the price of a movie is $6. • The figure shows Lisa’s budget line. • Its position depends on Lisa’s income and on the prices she faces. The Budget Equation In General In Lisa's Case 1. The variables: Income = Y Y = $30 Price of a movie = P M P M = $6 Price of pop = P P / P P = $3 Quantity of movies = Q M Quantity of pop = Q P 2. The budget: P P Q P + P M Q M = Y $3 Q P + $6 Q M = $30 3. The budget line: P P Q P + P M Q M = Y Divide both sides of equation by P P Q P + ( P M / P P ) Q M = Y/P P Subtract ( P M / P P )Q M from both sides of equation Q P = Y/P p - ( P M P P ) Q M 4. The budget line with numbers: $3 Q p + $6 Q M = $30 Divide both sides of equation by P P ($3) Q P + ($6 / $3) Q M = $30 / $3 Subtract ($6/$3) Q M from both sides of equation Q P = 10 - 2 Q M • When the price changes, so does the budget line. • When the price of a movie decreases, the budget line rotates outward and when the price of a movie increases, the budget line rotates inward. • A change in money income changes real income but does not change relative prices. • When income decreases, the budget line shifts inward. When income increases, the budget line shifts outward. Preferences and Indifference Curves • An indifference curve is a line that shows combinations of goods among which a consumer is indifferent....
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ch8 - Chapter 8 Possibilities Preferences and Choices...

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