Ch2_class_09

Ch2_class_09 - x2 m /p2 Budget Constraint for Two...

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Budget Constraint for Two Commodities x 2 x 1 Budget Line: p 1 x 1 + p 2 x 2 = m m /p 2 m /p 1
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Budget Constraint for Two Commodities x 2 x 1 Budget Line: p 1 x 1 + p 2 x 2 = m m /p 1 Budget Set the collection of all affordable bundles m /p 2
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Budget Constraints x 2 x 1 +1 -p 1 /p 2 The cost of an extra unit of commodity 1 is p 1 /p 2 units foregone of commodity 2.
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Budget Constraints: Income and Price Changes The budget line and budget set depend upon prices and income. What happens as prices or income change?
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How do the budget set and budget constraint change as income m increases? Original budget set x 2 x 1
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Higher income gives more choices Original budget set New affordable consumption choices x 2 x 1 Original and new budget lines are parallel (same slope).
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Budget Constraints: Income Changes Changes in income m (holding prices constant) shift the constraint in a parallel manner.
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Changes What happens if just one price decreases? Suppose p
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This note was uploaded on 09/14/2009 for the course ECON 100A taught by Professor Babcock during the Summer '07 term at UCSB.

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Ch2_class_09 - x2 m /p2 Budget Constraint for Two...

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