econ chapter 6

Econ chapter 6 - Chapter 6 Consumer Choice I Budget Constraint Budget constraint different combinations of goods a consumer can afford with a

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Chapter 6: Consumer Choice I. Budget Constraint Budget constraint: different combinations of goods a consumer can afford with a limited budget, at given prices. Budget line: graphical representation of a budget constraint, showing the maximum affordable quantity of one good for a given amounts of another good Relative price: the price of one good relative to the price of another Slope of the budget line indicates the spending tradeoff between one good and another- the amount of one good that must be sacrificed in order to buy more of another good. If Py is the price of the good on the vertical axis and Px is the price of the good on the horizontal axis, then the slope of the budget line is –Px/Py A. Changes in the Budget Line I. Changes in Income an increase in income will shift the budget line upward and rightward. Decrease in income will shift the budget line downward (and leftward). These shifts are parallel: Changes in income do not affect the budget line’s slope. II. Changes in Price price of a good changes, the budget line rotates: both its slope and one of its intercepts will change. II. Preferences A. Rationality people always will prefer one over another good rational preferences: preferences that satisfy two conditions: any two alternatives, one is preferred or else the two are valued equally comparisons are logically consistent or transitive B. More is Better consumer will always choose a point on the budget line, rather than a point below it Appendix: The Indifference Curve Approach
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I. An Indifference Curve An indifference curve represents all combinations of two goods that make the consumer equally well off MRSyx : Marginal rate of substitution of good y for good x- along any segment of an indifference curve is the maximum rate at which a consumer would willingly trade
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This note was uploaded on 02/26/2012 for the course ECON UA-2 taught by Professor Lieberman during the Spring '12 term at NYU.

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Econ chapter 6 - Chapter 6 Consumer Choice I Budget Constraint Budget constraint different combinations of goods a consumer can afford with a

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