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Principles of Economics- Mankiw (5th) 451

# Principles of Economics- Mankiw (5th) 451 - price of Pepsi...

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CHAPTER 21 THE THEORY OF CONSUMER CHOICE 465 measures the number of pizzas. Three points are marked on this figure. At point A, the consumer buys no Pepsi and consumes 100 pizzas. At point B, the consumer buys no pizza and consumes 500 pints of Pepsi. At point C, the consumer buys 50 pizzas and 250 pints of Pepsi. Point C, which is exactly at the middle of the line from A to B, is the point at which the consumer spends an equal amount (\$500) on Pepsi and pizza. Of course, these are only three of the many combinations of Pepsi and pizza that the consumer can choose. All the points on the line from A to B are possible. This line, called the budget constraint, shows the consumption bundles that the consumer can afford. In this case, it shows the tradeoff between Pepsi and pizza that the consumer faces. Table 21-1 T HE C ONSUMER S O PPORTUNITIES . This table shows what the consumer can afford if his income is \$1,000, the
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Unformatted text preview: price of Pepsi is \$2, and the price of pizza is \$10. N UMBER S PENDING S PENDING T OTAL P INTS OF P EPSI OF P IZZAS ON P EPSI ON P IZZA S PENDING 100 \$ \$1,000 \$1,000 50 90 100 900 1,000 100 80 200 800 1,000 150 70 300 700 1,000 200 60 400 600 1,000 250 50 500 500 1,000 300 40 600 400 1,000 350 30 700 300 1,000 400 20 800 200 1,000 450 10 900 100 1,000 500 1,000 1,000 100 Quantity of Pizza Quantity of Pepsi 250 50 500 B C A Consumer’s budget constraint Figure 21-1 T HE C ONSUMER ’ S B UDGET C ONSTRAINT . The budget constraint shows the various bundles of goods that the consumer can afford for a given income. Here the consumer buys bundles of Pepsi and pizza. The more Pepsi he buys, the less pizza he can afford. budget constraint the limit on the consumption bundles that a consumer can afford...
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