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ECON101 Lecture Notes - Lecture 13: Budget Constraint, Real Income, Relative Price

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School
University of Waterloo
Department
Economics
Course
ECON101
Professor
Nafeez Fatima

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11

ECON101 Lecture Notes - Lecture 11: Marginal Utility, Normal Good, Indifference Curve

13

ECON101 Lecture Notes - Lecture 13: Budget Constraint, Real Income, Relative Price

14

ECON101 Lecture Notes - Lecture 14: Demand Curve, Neuroeconomics, Budget Constraint

Document Summary

The budget line shows the various constraints of these two goods the consumer can afford given his/her income and prices of the good. The budget constraint"s graphical representation is the budget line. Pm x qm + pp x qp = y where pm = price of movie where pp = price of pop where qm = quantity of movie where qp = quantity of pop. 1 pm / pp relative price of movie. 2 pp / pm relative price of pop. A change in income shift the budget line income creases causes a rightward shift of the budget line. Income decrease causes a leftward shift of the budget line. A change in price of a good rotates the budget line inward or outward. Solve for affordable bundles, choose the bundle which has the maximum combined utility. From the affordable set, choose the bundle where marginal utility per dollar spent on each good are equal.

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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?

Respond True or False to the following, and explain why each answer is True or False:

a. If two goods x and y are perfect complements, then if the price of x falls, the entire change in demand for x is due to the income effect.

b. A consumer has the utility function given by U=min{x1,2x2}. If good 2, has a price of zero, the consumer will always strictly prefer more of good 2 to less.

c. Ivan spends his entire income on two goods. One of them is a Giffen good. If the price of the Giffen good rises, demand for the other good must fall.

d. Jimmy's utility function is U(a,b) = ab, where a is his consumption of apples and b is his consumption of bananas. If prices and income change in such a way that Jimmy's old consumption bundle lies on his new budget line, then Jimmy will not change his consumption bundle.

Assume that an individual consumes two goods, X and Y. The total utility (assumed measurable) of each good is independent of the consumption rate of other goods.
The price of X and Y are respectively $40 and $60. Use the following table of total utilities to answer the following questions.

Good Total utility X Total utility Y
 1  20  45
 2  38  78
 3  54  108
 4  68  135
 5  80  159
 6  90  180


a. The marginal utility of the fourth unit of Y is__________.
b. The marginal utility of the fifth unit of X is___________.
c. The marginal utility per dollar spent on the third unit of X is__________.
d. The marginal utility per dollar spent on the second unit of Y is__________.
e. If the consumer has $420 to spend, ______ unit of X and _______units of Y maximize utility subject to the budget constraint. Explain.
f. If the consumer has $220 to spend, _______ units of X and_______ units of Y maximize utility subject to the budget constraint. Explain.
g. If the consumer wanted 4 units of X and 6 units of Y, what would have to be his/her budget constraint in order to maximize his/her utility? Explain.