05-Budget Constraint

# 05-Budget Constraint - Prices (P F ) ( P F = 1) L 1 An...

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Consumer Behavior: Budget Constraint Reading: Chapter 3 You can’t have everything… Where would you put it? - Steven Wright

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2 Budget Constraints The Budget Line (or budget constraint) Shows all combinations of goods that can be bought at given prices and income Assume that consumer spends all her income on 2 goods (we do not consider savings) The budget constraint then can be written as: I C P F P C F = +
3 Example: I = \$80, P F = \$1, P C = \$2 Market Basket Food P F = \$1 Clothing P C = \$2 Income 80 = F + 2C A 0 40 \$80 B 20 30 \$80 D 40 20 \$80 E 60 10 \$80 G 80 0 \$80

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4 C F P P F C Slope - 2 1 - = = = Budget Line 10 20 A B D E G ( I/P C ) = 40 Food 40 60 80 = ( I/P F ) 20 10 20 30 0 Clothing
5 Budget Line: Changes in Income An increase in income shifts the budget line outward Food (units per week) Clothing (units per week) 80 120 160 40 20 40 60 80 0 ( I  = \$160) L 2 ( I  = \$80) L 1 L 3 ( I  = \$40) A decrease in income shifts the budget line inward

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6 Budget Line: Changes in One of the
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Unformatted text preview: Prices (P F ) ( P F = 1) L 1 An increase in the price of food to \$2.00 changes the slope of the budget line and rotates it inward. L 3 ( P F = 2) ( P F = 1/2) L 2 A decrease in the price of food to \$.50 changes the slope of the budget line and rotates it outward. 40 Food (units per week) Clothing (units per week) 80 120 160 40 7 Budget Line: Changes in Both Prices If both goods experience an increase (decrease) in price, but the ratio of the two prices is unchanged, the slope will not change However, the budget line will shift inward (outward) parallel to the original budget line What happens if income and both prices all double at the same time?...
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## This note was uploaded on 07/06/2009 for the course ECON 102A taught by Professor Sorensen during the Spring '08 term at UC Riverside.

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05-Budget Constraint - Prices (P F ) ( P F = 1) L 1 An...

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