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what is a budget constraint?
indentifies all the consumption bundles a consumer can afford over some period of time.
how do you know if a consumption bundle exhausts income?
if cost = income
what does a budget line show?
all the consumption bundles that just exhaust a consumers income
what does a reduction in income do to a budget line?
It shifts the budget line inward pg 128
what does an increase in income do to a budget line?
it pushes it out further pg 128
what does an increase in price do to a budget line?
it pushes it inward pg 129
what does a decrease in price do to a budget line?
it pushes it outward pg 129
what happens if price and income all change by the same proportion in relation to the budget line? Why?
Nothing. Because income changes just enough to compensate for the changing cost of goods.
what are properties of budget lines?
- 1.) It is the booundary that separates the affordable consumption bundles from all other bundles. Choices that do not exhaust the the consumers income lie to the SW of the budget line.
- 2.) The slope of the buget line equals the the price ratio times negative 1, with the price of the good measured on the horizontal axis appearing in the numerator, and the price of the good measured on the vertical axis appearing in the denominator.
- 3.) The budget line intersects the axis that measures the amount of any particular good, X at the quantity M/Px, which is the amount of X the consumer can purchase by spending all income on X.
- 4.) A change in income shifts the budget line outward for an increase and inward for a decrease, without changing its slope.
- 5.) A change in the price of a good rotates the budget line outward for a decrease and inward for an increase. The line pivots at the intercept for the good with the unchanged price.
- 6.) Multiplying sll prices by a single constant has the same effect on the budget line as dividing income by the same constant. Changing prices and income by the same proportion has no effect on the budget line.
what happens when something is rationed?
When the government or a supplier limits the amount that each connsumer can purchase
when is an affordable bundle an interior choice?
when for each good, there are affordable bundles containing a little bit more of that good and affordable bundles containing a little bit less of it. Also known as interior solution.
when does a bundle satisfy the tangency condition?
if at that bundle, the budgetline lies tangent to the consumers indifference curve.