2- Budgets

# 2- Budgets - Choice Sets with 3 Goods The introduction of...

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8/16/11 Choice Sets with 3 Goods The introduction of socks then adds a third dimension – because bundles of goods now consist of three numbers: one for pants, one for shirts and one for socks. And if we suppose that the price of socks is \$5, we can buy at most 40 socks (if we buy nothing else). That gives us point C on the socks axis. With our income of \$200 a \$20 price for pants, and a \$10 price for shirts, we can buy at most 10 pants (point A ) and at most 20 shirts (point B ).

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8/16/11 Choice Sets with 3 Goods Connecting A and B , we get our previous budget constraint when there was no option to buy socks.
8/16/11 Choice Sets with 3 Goods We similarly get the 2- dimensional budget constraint assuming there are no pants when we connect B and C . This gives all the bundles of shirts and socks that exhaust our \$200 exogenous income.

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8/16/11 Choice Sets with 3 Goods And, when we connect A and C , we get the 2- dimensional budget constraint assuming there are no shirts and all we are choosing is bundles of pants and socks.
8/16/11 Choice Sets with 3 Goods When we then fill in the plane that connects the three 2- dimensional budget

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