Chapter2 - Chapter 2 Budget constraint 1 Consumer theory...

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Chapter 2 - Budget constraint 1. Consumer theory: consumers choose the best bundles of goods they can afford. (a) this is virtually the entire theory in a nutshell (b) but this theory has many surprising consequences 2. Two parts to theory (a) “can afford” - budget constraint (b) “best” - according to consumers’ preferences 3. Consumption bundle (a) ( x 1 , x 2 ) - how much of each good is consumed (b) ( p 1 , p 2 ) - prices of the two goods (c) m - money the consumer has to spend (d) budget constraint : p 1 x 1 + p 2 x 2 = m (e) all ( x 1 , x 2 ) that satisfy this constraint make up the budget set of the con- sumer (see figure 2.1. in the textbook). 4. Two goods (a) theory works with more than two goods, but can’t draw pictures. (b) often think of good 2 (say) as a composite good, representing money to spend on other goods. (c) budget constraint becomes p 1 x 1 + x 2 m (d) money spent on good 1 ( p 1 x 1 ) plus the money spent on good 2 ( x 2 ) has to be less than or equal to the amount available ( m ).
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