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lecture2

# lecture2 - Professor Jay Bhattacharya Spring 2001 Budget...

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Professor Jay Bhattacharya Spring 2001 Econ 11--Lecture 2 1 Spring 2001 Econ 11--Lecture 2 1 The Theory of the Consumer • Model of individual choice: – “Consumers choose the best bundle of goods and services that they can afford .” • 1) “afford”: depends upon opportunities / budget constraints • 2) “best”: depends upon preferences • 3) “choose”: assumes optimizing (goal oriented) behavior Spring 2001 Econ 11--Lecture 2 2 Budget Constraints • A consumer must choose among bundles of goods: ( x 1 , x 2 , … x n ) example: (fish, beef, milk, CDs, books). • Each good has a price: ( p 1 , p 2 p n ). • The consumer has income I to spend on goods. Spring 2001 Econ 11--Lecture 2 3 Two Good Case • Consider the case of 2 goods ( x 1 , x 2 ) (e.g.., video games, baby food). Let’s say the price of these goods are p 1 , p 2 . • A bundle (x 1 , x 2 ) is affordable (in the budget set) if and only if p 1 x 1 + p 2 x 2 I . • The set of affordable bundles is the budget set . Spring 2001 Econ 11--Lecture 2 4 Budget Set x 1 x 2 p 1 x 1 + p 2 x 2 I 1 p I 2 p I 2 1 p p slope = Spring 2001 Econ 11--Lecture 2 5 Budget Line x 1 x 2 p 1 x 1 + p 2 x 2 I 1 p I 2 p I 2 1 p p slope = Spring 2001 Econ 11--Lecture 2 6 Budget Line ‘Facts’ • The budget line intersects the x 1 axis at I / p 1 • The budget line intersects the x 2 axis at I / p 2 • The slope of the budget line is -p 1 /p 2 – How do you show this? p 1 x 1 + p 2 x 2 = I x 2 = I / p 2 - ( p 1 / p 2 ) x 1 • The consumer can buy only positive amounts of goods, so x 1 0 and x 2 0

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Professor Jay Bhattacharya Spring 2001 Econ 11--Lecture 2 2 Spring 2001 Econ 11--Lecture 2 7
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lecture2 - Professor Jay Bhattacharya Spring 2001 Budget...

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