3_Budgets_Choice

3_Budgets_Choice - 3. BUDGETS & CHOICE Rubinfeld & Pindyck...

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Rubinfeld & Pindyck 3.2, 3.3
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udget constraint Budget constraint The budget constraint is a straight line. The points on the line, and below the line (in the positive quadrant) are the budget set. The equation of the budget constraint: P p p+±P e e = I p = I/P p – (P e /P p )e Question: could the budget constraint be a kinked line?
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hanges to budget constraints Changes to budget constraints If income changes but prices stay constant, the budget constraint shifts in parallel direction.
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hanges to budget constraints Changes to budget constraints If income stays constant but prices change, it rotates.
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Consumer Choice How do you choose which bundle to buy? Ones that you cannot afford are eliminated. But your budget set still has more than 1 bundle. What rule do you use? Economists make the assumption that people try to get the most value for their money. In other words, maximize your satisfaction, subject to your
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This note was uploaded on 07/30/2011 for the course ECO 112 taught by Professor Man during the Spring '11 term at HKU.

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3_Budgets_Choice - 3. BUDGETS & CHOICE Rubinfeld & Pindyck...

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