05-Budget Constraint

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

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
Consumer Behavior: Budget Constraint Reading: Chapter 3 You can’t have everything… Where would you put it? - Steven Wright
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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 = +
Background image of page 2
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
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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
Background image of page 4
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
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
6 Budget Line: Changes in One of the
Background image of page 6
Background image of page 7
This is the end of the preview. Sign up to access the rest of the document.

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?...
View Full Document

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.

Page1 / 7

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

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online