Lecture 5 _Feb 2_ - Economics 100A Lecture #5: Tuesday,...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Economics 100A Lecture #5: Tuesday, Feb. 2 The Consumer’s Budget and Utility Maximization
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 The consumer’s budget Characterize the consumer’s “opportunity set” and her “budget line” Examine how the simple budget line changes when income and prices change. Examine more complicated budget lines.
Background image of page 2
3 Median annual income: $44,389 Average annual expenditures: $43,395 Food $5,781 Alcoholic Beverages $459 Housing $13,918 Apparel $1,816 Transportation $7,801 Health care $2,218 Entertainment $2,636 Insurance, pensions $4,823 Source: U.S. Census Bureau U.S. household expenditure, 2004
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4 0.8b >40$/day 1.4b 2$/day 1.3b 1$/day 1.3b 4$/day 1.5b 4-40$/day World population split according to income segment (USD per capita per day) The World’s Income Pyramid B.O.P.
Background image of page 4
5 Consumer’s budget Money income I is money income (net of income taxes) available to buy goods per unit of time (month, year). Includes earnings on assets less loan/credit card debt payments. Nominal prices p x = price of x = music albums (CDs, downloads) p y = price of y = movies (tickets, rental, PPV) Note: 1/price is the number of units that can be bought with $1
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
6 Consumer’s budget (cont’d) A “Composite good” A second good that includes all other possible goods as “composites” Typically we assume that p Y = $1 Puts focus on single good (very partial equilibrium) Expenditures p x x + p y y = expenditure on “entertainment” All I does not have to be spent on goods: consumers can “save” (but that is a different model)
Background image of page 6
7 The “opportunity set” All baskets that are affordable—given income and prices: p x x + p y y < I Both income and prices both assumed known The “budget line” Baskets on the “frontier” of the opportunity set: p x x + p y y = I Intercepts equal maximum of a good that can be purchased E.g., if all money spent on music (none on movies), then can buy I / p x albums
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
8 Opportunity set and budget line I/P x y x C I/P y Budget line = BL Slope = - P x /P y B D A
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

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.

Page1 / 30

Lecture 5 _Feb 2_ - Economics 100A Lecture #5: Tuesday,...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online