Chapter 4

Chapter 4 - • Increase in income shifts the budget line...

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Kimberly Zhang Chapter 4 Budget constraint: the set of baskets that a consumer can purchase with a limited amount of income Budget line: the set of baskets that a consumer can purchase when spending all of his or her available income (P x x + P y y = I; slope = -P x / P y ) o Slope of budget line tells us how many units of the good on the vertical axis a consumer must give up to obtain an additional unit of the good on the horizontal axis Increase in price of one good moves the intercept on that good’s axis toward the origin
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Unformatted text preview: • Increase in income shifts the budget line outward in a parallel fashion • Optimal choice: consumer choice of a basket of goods that (1) maximizes satisfaction (utility) while (2) allowing him to live within his budget constraint o Must be located on the budget line • MRS x,y = MU x / MU y = P x / P y • Interior optimum: an optimal basket at which a consumer will be purchasing positive amounts of all commodities •...
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This note was uploaded on 09/13/2009 for the course 220 203 taught by Professor Sheflin during the Spring '09 term at Rutgers.

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