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
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?
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).
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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