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9/13 Economics
Chapter 2 Budget Constraint
Consumer theory: consumers choose thebest bundles of goods they can afford.
•
This is virtually the entire theory in a nutshell
•
But this theory has some surprising implications
Two parts to theory
1.
“Can afford”
budget constraint
2.
“best” according to consumers’
preferences
Assumptions and Notation
•
Two “goods” (or “commodities” ) called
“good1” and “good2” ( or
“commodity1” and “ commodity2”)
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X1, quantity of good 1
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X2, quantit ofgood 2
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X1 is equal and equal to 0, and x2 is equal and equal to 0
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P1, price of good 1
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P2, price of good 2
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P1 is greater than 0 and p2 is greater than 0
•
m, the amount of money the consumercan spend (also called “income” in the
textbook)
•
m is greater than 0
•
The ordered pair (x1, x2) (with x1 units of good 1 and x2 units of good 2) is
called a “consumption bundle”
Q: When is a bundle, (x1, x2), affordable at prices p1,p2?
Money spent on good 1=p1x1
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 Fall '11
 jakiela
 Economics

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