ECON 212 Chapter Notes - Chapter 4: Budget Constraint, Internetwork Packet Exchange

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The budget constraint defines the set on bundles that a consumer can purchase with a limited amount of income pxx + pyy i. Price of good 1 = px and price of good 2 = py and income is fixed at i. The budget line is the set of the bundles a consumer can buy if they spend all their available income in the two goods i = pxx + pyy. When drawing the budget line, y-int = i/py, x-int = i/px, and slope = px/py. The slope tells us how many units of the good on the vertical axis a consumer must give up to get one unit of the good on the horizontal axis. An increase in income shifts the budget line out to the right, expanding the consumers purchasing ability (can buy more) A decrease in income shifts the budget line in to the left the consumer has more limited consumption opportunities (can buy less)

Related Questions

Over the past decade, medical costs have increased more rapidly than other prices. In order to illustrate how rising medical costs have affected consumer alternatives, let X represent the quantity of medical services, and let Y represent the quantity of other goods. Furthermore, let income (M) be measured in hundreds of dollars, the price of medical services and other goods in terms of dollars per minute, with M = 100, Px = 4, and Py = 5.

a. Graph the budget line, and determine the market rate of substitution.

b. Illustrate the budget set.

c. Show in your graph what happens to the budget constraint if Px increases to $10.

d. What is the meaning of the slope of the two budget constraints?

lemonpug392

Assume the demand function for good X can be written as:

QX = 30 - 3PX + 2PY + 0.2I

Where PX is the price of good X PY is the price of good Y I is the consumer income.

a) Based on the demand curve above, is X a normal or inferior good?

b) Based on the demand curve above, what is the relationship between good X and good Y?

c) What is the equation of the demand curve if consumer incomes are $40,000 (use $40, income in thousands) and the price of good Y is $35?

23) Good X is measured on the horizontal axis and good Y is measured on the vertical axis. The marginal rate of substitution is A) the relative price of good X in terms of good Y. B) the relative price of good Y in terms of good X. C) the rate at which a consumer will give up good Y to obtain an additional unit of good X while remaining indifferent. D) the rate at which a consumer will give up good X to obtain an additional unit of good Y while remaining indifferent. E) equal to the magnitude of the slope of the budget line.

ECON 212 Chapter Notes - Chapter 4: Budget Constraint, Internetwork Packet Exchange

ECON 212 Full Course Notes

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