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Unformatted text preview: C H A P T E R 2 Choice Sets and Budget Constraints Consumers are people who try to do the “best they can” given their “budget cir- cumstances” or what we will call their budget constraints . This chapter develops a model for these budget constraints that simply specify which bundles of goods and services are affordable for a consumer. Chapter Highlights The main points of the chapter are: 1. Constraints arise from “what we bring to the table” — whether that is in the form of an exogenous income or an endowment — and from the opportu- nity costs that arise through prices. 2. Changes in “what we bring to the table” do not alter opportunity costs — and thus shift budgets without changing slopes . 3. Changes in prices result in changes in opportunity costs — and thus alter the slopes of budgets . 4. With three goods, budget constraints become planes and choice sets are 3- dimensional — or they can be treated mathematically instead of graphically. 5. A composite good represents a way of indexing consumption other than the good of interest — and allows us to make the 2-good model more general. Using the LiveGraphs For an overview of what is contained on the LiveGraphs site for each of the chapters (from Chapter 2 through 29) and how you might utilize this resource, see pages 2-3 of Chapter 1 of this Study Guide . To access the LiveGraphs for Chapter 2, click the Choice Sets and Budget Constraints 6 Chapter 2 tab on the left side of the LiveGraphs web site. In addition to the Animated Graphics , the Static Graphics and the Downloads that accompany each of the graphs in the text of this chapter, we have several Ex- ploring Relationships modules that might be helpful as you first think through budget constraints. In particular, you’ll find the following under the Exploring Re- lationships tab: 1. A module that allows you to specify prices and income levels and then check to see what the resulting budget constraint looks like. 2. A module that allows you to furthermore change income to see how the bud- get constraint is impacted. 3. A module that allows you to alter prices and check the impact on the budget constraint. 4. A module that allows you to explore the formation of kinks in budgets . 5. Finally, we have a pretty neat module that summarizes all possible changes to budget constraints — with both two and three goods. 2A Solutions to Within-Chapter-Exercises for Part A Exercise 2A.1 Instead of putting pants on the horizontal axis and shirts on the vertical, put pants on the vertical and shirts on the horizontal. Show how the budget constraint looks and read from the slope what the opportunity cost of shirts (in terms of pants) and pants (in terms of shirts) is....
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This note was uploaded on 02/13/2011 for the course ECON 100A taught by Professor Woroch during the Fall '08 term at University of California, Berkeley.
- Fall '08