lec3 - 2010-03-091Econ201Consumer BehaviorDevelop a Model...

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Unformatted text preview: 2010-03-091Econ201Consumer BehaviorDevelop a Model of Consumer Behavior•Step 1: Preferences/Tastes–What is desirable•Step 2: Budget Constraint–What is affordable•Step 3: Optimal Bundle–What is chosenVideosAn Example of the Budget ConstraintSlope = -1/2Income=$100Price of ice cream = $1 per conePrice of videos = $2 per video50Ice CreamFeasible bundlesNot feasible (not affordable)5025100Good Y (Videos)Deriving the Budget ConstraintI/Py= 50Slope = -1/2Income=$100Px=$1Py=$2$100 = ($1) X + ($2) Y($2)Y = -($1)X + 100Y = -($1/$2)X + 50slope-intercept form:y = mx + bGood X (Ice Cream)I/Px= 1005025Good Y (Videos)An Equation for the Budget ConstraintSlope = -Px/Py= -1/2Income (I) =$100Px=$1Py=$2I = (Px)X + (Py)Y(Py)Y = -(Px)X + IY = -(Px/Py)X + I/PyI/Py=50Good X (Ice Cream)Feasible bundlesNot feasible (not affordable)100Good Y (Videos)The Slope of the Budget Constraint50Slope = -Px/Py= -1/212Give up 1 unit of Y for 2 units of XIncome=$100Px=$1Py=$2Good X (Ice Cream)1001/2Give up 1 unit of X for 1/2 unit of Y12010-03-092504030FlowersAnother Budget ConstraintSlope = -10 = -Px/PyIncome= $50Price of Flowers=$1Price of Dinner= $10520104321Dinners101or 1 flower1/10 dinnerIncome Falls in HalfFlowers50Income= $50Price of Flowers=$1Price of Dinner= $10X= $25...
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lec3 - 2010-03-091Econ201Consumer BehaviorDevelop a Model...

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