Tsinghua Micro Ch2 020913 - Chapter Two Budget Constraint...

Info iconThis preview shows pages 1–12. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter Two Budget Constraint
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Where are We in the Course? We are working on the 1 st of the 3 components of microeconomics: Consumer behavior, production theory, and market. There are three elements of consumer behavior: budget constraint, preference, and choices.
Background image of page 2
Consumption Choice Sets A consumption choice set is the collection of all consumption choices available to the consumer. What constrains consumption choice? Budgetary, time and other resource limitations.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Budget Constraints Q: When is a bundle (x 1 , … , x n ) affordable at prices p 1 , … , p n ? A: When p 1 x 1 + … + p n x n m where m is the consumer’s (disposable) income.
Background image of page 4
Budget Constraints The consumer’s budget set is the set of all affordable bundles; B(p 1 , … , p n , m ) = { (x 1 , … , x n ) | x 1 0, … , x n 0 and p 1 x 1 + … + p n x n m } The budget constraint is the upper boundary of the budget set.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Budget Set and Constraint for Two Commodities x 2 x 1 Budget constraint is p 1 x 1 + p 2 x 2 = m. m /p 1 Affordable Just affordable Not affordable m /p 2
Background image of page 6
Budget Set and Constraint for Two Commodities x 2 x 1 p 1 x 1 + p 2 x 2 = m is x 2 = -(p 1 /p 2 )x 1 + m /p 2 so slope is -p 1 /p 2 . m /p 1 Budget Set m /p 2
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Budget Constraints If n = 3 what do the budget constraint and the budget set look like?
Background image of page 8
Budget Set for Three Commodities x 2 x 1 x 3 m /p 2 m /p 1 m /p 3 { (x 1 ,x 2 ,x 3 ) | x 1 0, x 2 0, x 3 0 and p 1 x 1 + p 2 x 2 + p 3 x 3 m }
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Budget Constraints For n = 2 and x 1 on the horizontal axis, the constraint’s slope is -p 1 /p 2 . What does it mean? Increasing x 1 by 1 must reduce x 2 by p 1 /p 2. x p p x m p 2 1 2 1 2 = - +
Background image of page 10
x 2 x 1 Opp. cost of an extra unit of commodity 1 is p 1 /p 2 units foregone of commodity 2. And the opp. cost of an extra unit of commodity 2 is p 2 /p 1 units foregone of commodity 1. -p
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 12
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 12/06/2011 for the course BUSINESS MicroEco taught by Professor Luyu during the Spring '11 term at Tsinghua University.

Page1 / 49

Tsinghua Micro Ch2 020913 - Chapter Two Budget Constraint...

This preview shows document pages 1 - 12. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online