Section5 - Aniko Oery University of California Berkeley...

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Aniko Oery University of California, Berkeley Section 5: Budget sets and consumer choice Econ 100A, MICRO-ECONOMIC ANALYSIS, Spring 2010 Last week we have introduced preferences and utility functions in order to model the tastes of people. If we assume, that a decision maker usually likes more better than less, then he would want to consume as much as possible from every good. However, unfortunately we face the problem of scarcity, that is there is not an infinite amount of all goods! Because of scarcity, we have to pay a price for the goods that we consume. In that way our choice faces a constraint- the budget constraint- which we will discuss today. Finally, we will analyze how decision makers make choices given their utility function and the budget constraint. We will restrict our analysis to two goods. 1 Budget sets The budget set discribes all feasible consumption bundles that you can buy given your income I . Given linear pricing schemes where good x costs p x per unit and good y costs p y per unit, the
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