Budget ConstraintSuppose that we cannot borrow or save. Then we cannot spend morethan our income.Assume there are 2 goods,q1andq2, with pricesp1andp2,respectively. The available income isY.The set of bundles we can buy is de°ned byp1q1+p2q26Yq1>0,q2>0.The constraintp1q1+p2q26Yis known as thebudget constraint.The line with equationp1q1+p2q2=Yis known as thebudget line.The set of a/ordable bundles is called thefeasible set(or theopportunity set).Vladimir Petkov(VUW)Lecture 3: Consumer Choice08 March 20092 / 26
Budget Constraint (Continued)Imagine thatp1=$1,p2=$2,Y=$500.The graph below illustrates the opportunity set.Vladimir Petkov(VUW)Lecture 3: Consumer Choice08 March 20093 / 26
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Budget Constraint (Continued)We can rewrite the budget line asq2= (Y°p1q1)/p2.Thus, the slope of the budget line is°p1/p2.The vertical intercept (atq1=0) isY/p2.The horizontal intercept (atq2=0) isY/p1.q1q22pY1pYSlope is2112ppdqdq-=Budget line equation is12122qPppYq-=Vladimir Petkov(VUW)Lecture 3: Consumer Choice08 March 20094 / 26