Ch04_spr08_pam200

# Ch04_spr08_pam200 - PAM 200 Intermediate Microeconomics A...

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PAM 200 Intermediate Microeconomics A. Sinan Ünür Consumer Choice Consumer Choice Chapter 4

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Chapter 4 PAM 200 – A. Sinan Ünür How much does a bundle cost? • Cost of a Bundle X = ( x 1 , x 2 , …, x n ) is simple the sum of prices times quantities: p 1 x 1 + p 2 x 2 + … + p n x n p 1 x 1 is money spent on good 1 p 2 x 2 is money spent on good 2 etc …
Chapter 4 PAM 200 – A. Sinan Ünür Opportunity Set / Budget Constraint Consumers have a given amount of money they can use to buy goods and services. Goods and services have a positive prices . Therefore: Some bundles are too expensive . The cost of such a bundle exceeds the consumer’s budget. Other bundles are affordable . The cost of such a bundle is less than or equal to the consumer’s budget. The opportunity set (or the budget set ) shows us which bundles are affordable and which ones are not affordable

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Chapter 4 PAM 200 – A. Sinan Ünür The Budget Line The budget line (also called the budget constraint) is the set of all bundles that exactly exhaust the consumer’s budget at given prices . E.g.: F denotes food, P F denotes the price of food, C denotes clothing, and P C denotes the price of clothing (per unit of time). The cost of a given bundle of food and clothing, (F, C), is given by P F F + P C C. The consumer has a total of I dollars to spend on food and clothing Bundles that cost exactly I dollars are found by solving I = P F F + P c C for nonnegative F and C Rewriting: C = I/P C ( P F /P C ) F
Chapter 4 PAM 200 – A. Sinan Ünür Budget Constraint Example Eric has \$800/month which he can spend on food and clothing. P F = \$20 per unit, P C = \$40 per unit. His budget constraint is: 0 , 0 800 40 20 + + C F C F I C P F P C F

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Budget Constraint Example Units of food per month Units of  clothing  per  month 20 40 Absolute value of the slope of the budget line = opportunity cost of food in terms of clothing = P F  / P C Unaffordable
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Ch04_spr08_pam200 - PAM 200 Intermediate Microeconomics A...

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