budget constraints

budget constraints - outside of the budget set and budget...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
6. b. The Budget Constraint A consumer cannot just take any market basket he wishes. He is bound by the price of the goods and his ability to pay for those goods or his income. In this example (figure 6.b.1) the consumer can buy candy for $1.00 each and a bag of potato chips for $1.50 each. The consumer has an income of $5.00. The consumer can choose to spend all his money on Candy or Potato Chips, or he can find some combination of both. The budget line is made by connecting the points on the axis where all of the income is spent on one good. At any point along the budget line, such as points A B or C, the consumer exhausts his income. If a consumer where to choose a point in the shaded region, he/she would not exhaust his income. However, a point like D is completely unattainable because it is
Image of page 1

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

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: outside of the budget set and budget line, and cannot be afforded. To find the slope of the budget line, remember that ∆ C / ∆ P = -P P /P C Slope of the budget line in this example = - ($1.50) / ($1.00) = - 1.5. If the market price for potato chips changed from $1.50 to $1.00, the consumer’s budget line would remain fixed on the y-axis and would shift out along the x-axis to the point where the number of chips bought would exhaust the $5.00 income. If the consumer had a change in his income from $5.00 to $6.00, then he could afford to purchase more goods and his budget line would shift outward (figure 6.a.3). However, if he experienced a decrease in income his budget line would shift inward....
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern