# budget constraint adv - 6.b The Budget Constraint In the...

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6.b The Budget Constraint In the previous section we looked at indifference curves, which showed what the consumer would like to have with respect to two goods X and Y. In this section we will look at what the consumer can actually afford. A budget constraint is an equation, graph, or table that shows the bundles available to the consumer. If we again assume there are only two goods available X and Y, a budget constraint has the equation I = P x ·X + P y ·Y. In this equation I is the total money income, P x is the price of good X, and P y is the price of good Y. Since there are only two goods, the left side of this equation represents total expenditure. Let's go over an example of a budget constraint. Let total income I = \$100, price of good X P x = \$10 and price of good Y P y = \$5. Table 6.b.1 shows the bundles that can be acquired under this budget constraint. X Y 0 20 1 18 2 16 10 0 If the consumer buys none of good X, then the budget allows for 20 units of good Y to be bought. If the consumer buys one unit of good X, then what is left in the budget is enough to buy 18 units of good Y. As the consumer buys more of X, less of Y can be bought all the way until the consumer buys 10 units of good X when nothing is left in the budget to by good Y. Plotting these bundles on a graph gives us the budget line . Diagram 6.b.1 shows the budget line corresponding to table 6.b.1.

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budget constraint adv - 6.b The Budget Constraint In the...

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