ECON 201 Lecture Notes - Lecture 4: Budget Constraint, Indifference Curve, Lagrange Multiplier
Document Summary
Consumer choice 1 budget constraint assume only two goods available: x1 and x2 price of x1: p1 ; price of x2: p2 income: i total expenditure on basket (x1 ,x2): budget constraint: . The set of baskets that the consumer may purchase given the limits of the available income. Budget line: the set of baskets that one can purchase when spending all available income. How does a change in income affect the budget line consumer choice 2. How does a change in price affect the budget line constrained consumer. Consumer choice 3 so the optimal bundle must be on budget line and be on an ic that does not cross it. A tangent: to a function is a straight line that has the same slope as the function therefore . The rate at which the consumer would be willing to exchange x for y is the same as the rate at which they are exchanged in the marketplace.