{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Ch04 - Chapter 4 Consumer Choice The Budget Constraint...

Info icon This preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 4 Consumer Choice
Image of page 1

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

View Full Document Right Arrow Icon
The Budget Constraint Suppose a consumer, Eric, purchases only food and clothing. Let x be the number of units of food and y the number of units of clothing per month. The price of a unit of food is P x and the price of a unit of clothing is P y . Assume his income is fixed to I dollars per month. Eric’s total monthly expenditure on food: P x x Eric’s total monthly expenditure on clothing: P y y If he spends all of his income, P x x + P y y = I Budget line: The set of baskets that a consumer can purchase when spending all of her available income.
Image of page 2
The Budget Constraint Suppose that Eric has an income of I = $800, the price of food P x = $20 per unit, and the price of clothing P y = $40 per unit. What is Eric’s budget line? Let the horizontal axis measure the units of food and the vertical axis the units of clothing, sketch Eric’s budget line. Consider the following baskets: Basket A: x = 0, y = 20, Basket E: x = 40, y = 0, Basket C: x = 20, y = 10, Basket F : x = 10, y = 10, Basket G: x = 20, y = 15. Which baskets can he buy? Which can not? The Budget constraint: The set of baskets that a consumer can purchase with a limited amount of income. The budget constraint can be expressed as: P x x + P y y ≤ I
Image of page 3

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

View Full Document Right Arrow Icon
The Budget Constraint
Image of page 4
Change in Income If Eric spends all of his income on food, he purchases I/P x units of food: Horizontal intercept = I/P x If Eric spends all of his income on clothing, he purchases I/P y units of clothing: Vertical intercept = I/P y Suppose that Eric’s income goes up to $1,000 with the prices unchanged. What would be the two intercepts? Sketch Eric’s new budget line. Can Eric buy the basket G now? An increase in income shifts the budget line outward. Budget constraint is relaxed, or, consumer’s purchasing power has increased. An decrease in income shifts the budget line inward. Budget constraint is tightened, or, consumer’s purchasing power has decreased. Prices unchanged, the shifts are in parallel fashion.
Image of page 5

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

View Full Document Right Arrow Icon
Change in Income
Image of page 6
Change in Price How many units of clothing must Eric give up for additional unit of food? Since food is half as expensive as clothing, Eric must give up 1/2 unit of clothing for each additional unit of food: P x /P y = 1/2. For example, if he wants to gain 10 units of food, he must give up 5 units of clothing: ∆x = 10, ∆y = -5. ∆y/ ∆x = -1/2.
Image of page 7

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

View Full Document Right Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern