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PART SEVEN
ADVANCED TOPIC
The slope of the budget constraint measures the rate at which the consumer
can trade one good for the other. Recall from the appendix to Chapter 2 that the
slope between two points is calculated as the change in the vertical distance di
vided by the change in the horizontal distance (“rise over run”). From point A to
point B, the vertical distance is 500 pints, and the horizontal distance is 100 pizzas.
Thus, the slope is 5 pints per pizza. (Actually, because the budget constraint slopes
downward, the slope is a negative number. But for our purposes we can ignore the
minus sign.)
Notice that the slope of the budget constraint equals the
relative price
of the two
goods—the price of one good compared to the price of the other. A pizza costs 5
times as much as a pint of Pepsi, so the opportunity cost of a pizza is 5 pints of
Pepsi. The budget constraint’s slope of 5 reflects the tradeoff the market is offering
the consumer: 1 pizza for 5 pints of Pepsi.
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 Spring '10
 abijian

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