Budget_Constraint_au06

Budget_Constraint_au06 - Consumer Choice Constraints...

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1 Consumer Choice Constraints: Prices Income (Endowments) Budget Constraint Time Constraint Preferences: Represented by: Indifferences Curves Utility Functions Optimal Choice : Maximize Utility s.t. constraints Demand for Goods Labor Supply Savings

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2 Budget Constraint: Imagine: You have \$24 (Y=24) to spend on beer (x 1 ) and pizza (x 2 ). Beer costs \$2 per cup (p 1 = 2) and pizza costs \$3 per slice (p 2 = 3). The budget constraint is: 2x 1 + 3 x 2 = 24 => x 2 = 8 - 2 3 x 1 or, in general : p 1 x 1 + p 2 x 2 = Y => x 2 = 2 Y p - 1 2 p p x 1 Assume : Can consume fractions of beer, pizza Can’t consume negative beer or pizza (Note: can have, in principle, any # of goods p 1 x 1 + p 2 x 2 + p 3 x 3 + p 4 x 4 + . . . + p N x N = Y Also, we can aggregate several good together to compare x 1 with “all other goods” x 2 )
2x 1 + 3 x 2 = 24 => x 2 = 8 - 2 3 x 1 p 1 x 1 + p 2 x 2 = Y => x 2 = 2 Y p - 1 2 p p x 1 Slope of the budget line is the “opportunity cost”: number of slices of pizza need to give up to consume one more cup of beer. 1

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This note was uploaded on 05/24/2011 for the course ECON 201 taught by Professor Paulclacott during the Fall '10 term at Victoria Wellington.

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Budget_Constraint_au06 - Consumer Choice Constraints...

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