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blanchard_ch08

# blanchard_ch08 - 9160335_CH08_p169-188.qxd 9:00 AM Page 169...

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Consumption Possibilities Consumption choices are limited by income and by prices. A household has a given amount of income to spend and cannot influence the prices of the goods and services it buys. A household’s budget line describes the limits to its consumption choices. Let’s look at Lisa’s budget line. * Lisa has an income of \$40 a month to spend. She buys two goods: movies and soda. The price of a movie is \$6, and the price of soda is \$4 a case. Figure 8.1 shows alternative combinations of movies and soda that Lisa can afford. In row A , she sees no movies and buys 10 cases of soda. In row F , she sees 5 movies and buys no soda. Both of these combinations of movies and soda exhaust the \$40 available. Check that the combination of movies and soda in each of the other rows also exhausts Lisa’s \$40 of income. The numbers in the table and the points A through F in the graph describe Lisa’s consumption possibilities. Divisible and Indivisible Goods Some goods— called divisible goods—can be bought in any quan- tity desired. Examples are gasoline and electricity.
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