This preview shows pages 1–2. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: Chapter 2 Review: Budget Constraint We review here chapter 2 of Varian’s “Intermediate Microeconomics”. 1 In consumer theory, the consumer chooses the best bundles of goods (s)he can afford. There are two parts to theory, 1) “can afford”, which refers to the budget constraint , and 2) “best”, which means according to consumer’s preferences . 2.1 The budget constraint Given two goods 1 and 2 denoted x 1 ,x 2 with prices p 1 ,p 2 , respectively, a consumer may choose to purchase and consume some consumption bun- dle ( x 1 ,x 2 ) using his/her income, m . The budget constraint of the consumer can be written as p 1 x 1 + p 2 x 2 ≤ m (2.1) The budget constraint simply says that the amount of money spent on good 1, p 1 x 1 , plus the amount of money spent on good 2, p 2 x 2 , be no more than the total amount of money the consumer has to spend, m. 1 This is not a substitute to reading the text and doing the exercises at the end of the chapter....
View Full Document
- Spring '10