consumers_choice_2 - Microeconomics I Consumers Budget...

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Click to edit Master subtitle style Microeconomics I Consumer’s Budget Constraint. Utility Maximization.
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Consumer’s Budget m - money income available to by goods Nominal prices P x – price of X P y – price of Y Expenditures: P x X*P y Y = m
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Budget Constraint Budget line (or budget constraint) – the bundles of goods that can be bought if the entire budget is spent on those goods at given prices: P x X + P y Y = m Opportunity set – all the bundles a consumer can buy including all the bundles inside the budget constraint and on the budget constraint: P x X + P y Y ≥ m
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44–4 Budget Constraint and Opportunity Set
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Marginal Rate of Transformation MRT the trade-off the market imposes on the consumer in terms of the amount of one good the consumer must give up to obtain more of the other good MRT = Δy/Δx = - Px/Py
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Example Prices and income: p x = 12€, P y = 6€, m = 120€ Budget line: 12x + 6y = 120 Bundle DVD s Movie expenditures CD Music expenditures Total expenditures A 12 144 € 0 0 € 144 € B 8 96 € 4 24 € 120 € C 4 48 € 10 60 € 108 € D 0 0 € 20 120 € 120 €
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Example (cont.) BL slope = Δy/Δx = - p x /p y = - 12 €/6€ = -2
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Changes in Prices and Income Changes in prices (holding income fixed) Increase in one price Ø rotates budget line towards origin for new price ratio Increase in all prices: Ø shift budget line parallel towards origin Ø new price ratio (unless same percentage change of all prices)
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How do the budget set and budget constraint change as income m increases? Original budget set x 2 x 1
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Higher income gives more choice Original budget set New affordable consumption choices x 2 x 1 Original and new budget constraints are parallel (same slope).
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constraint change as income m decreases? Original
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This note was uploaded on 05/30/2011 for the course ACC 101 taught by Professor Worfy during the Winter '08 term at Akademia Ekonomiczna w Poznaniu.

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consumers_choice_2 - Microeconomics I Consumers Budget...

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