Principles of Economics- Mankiw (5th) 459

Principles of Economics- Mankiw (5th) 459 - CHAPTER 21 THE...

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CHAPTER 21 THE THEORY OF CONSUMER CHOICE 473 that income increases. With higher income, the consumer can afford more of both goods. The increase in income, therefore, shifts the budget constraint outward, as in Figure 21-7. Because the relative price of the two goods has not changed, the slope of the new budget constraint is the same as the slope of the initial budget constraint. That is, an increase in income leads to a parallel shift in the budget constraint. The expanded budget constraint allows the consumer to choose a better com- bination of Pepsi and pizza. In other words, the consumer can now reach a higher indifference curve. Given the shift in the budget constraint and the consumer’s preferences as represented by his indifference curves, the consumer’s optimum moves from the point labeled “initial optimum” to the point labeled “new opti- mum.” Notice that, in Figure 21-7, the consumer chooses to consume more Pepsi and more pizza. Although the logic of the model does not require increased consump-
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