budget constraints

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

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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

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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....
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