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Unformatted text preview: Department of Economics University of California, Berkeley ECON 100A Spring 2010- Section 4 GSI: Antonio Rosato 1 Utility Functions One example of utility function is u ( F,C ) = F · C . We can draw indifference curves for this function with different utility levels. Let’s draw them for u ( F,C ) = 4, u ( F,C ) = 9, u ( F,C ) = 16. 2 Budget Constraints We continue our discussion of consumer behavior. The next element of consumer theory is the budget constraint. The first one was preferences. This is where prices and income enter into play, since utility functions don’t take into account any of these. We assume that the consumer has income I , that the prices of the goods are given as P F ,P C , and that the consumer spends all of his income on the two goods. This results in the budget constraint: P C C + P F F = I . This tells us what bundles the consumer can afford to buy. If the income of the consumer is $80, price of C is 2 and price of F is 1, then how many units of food can this consumer buy at the most? 80, and then he buys no clothing. How many units of clothing without buying any food? 40. We can then graph this on the food-clothing system. What is the slope of this line? To find this, we would like to rewrite the budget constraint as y = a + bx . What is y in here? C . So we have C = I/P C- P F /P c · F . What is the slope of this line?- P F /P C . And the intercepts are I/P C with the y axis and I/P F with the x axis. The slope tells us at what rate the two goods can be substituted while spending the same amount of money. What happens if income increases to $100? We have a parallel shift in the budget constraint. The prices didn’t change, so the slope is the same....
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This note was uploaded on 03/18/2010 for the course ECON 100A taught by Professor Woroch during the Spring '08 term at University of California, Berkeley.
- Spring '08