THEORY OF CONSUMER BEHAVIOR

# Budget equation can be represented as the total of

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Budget equation can be represented as the total of expenditures for good x and y equals to income or: P x x + P y y = Y 7. To determine the number of units consume for each good: x P Y and y P Y 8. Graphical presentation

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Budget line or line of attainable combination = represents a locus of combinations of good x and y that can be purchased when the consumer spends the entire amount of money or income available the consumer can also buy any of the combinations x and y below the line; therefore purchasing power will not be fully utilized and there is savings slope of the budget line is negative and is numerically equal to the ratio of prices of x and y slope of BL = - y x P P Numerical example: Given: 2 goods x and y P x = P5 P y = P10 Available money/income is P160.00 Problems : a) Determine the budget equation b) Determine the number of maximum units of x and y spent given the income c) Show the graphical presentation Solution: a) Budget equation: 5x + 10y = 160 b) Maximum units of x spent: 32 5 160 = Maximum units of y spent: 16 10 160 =
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