Class Notes (808,753)
BSEN 401 (13)
Lecture

# BUDGET CONTRAINTS.docx

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School
University of Calgary
Department
Course
BSEN 401
Professor
William Huddleston
Semester
Fall

Description
BUDGET CONTRAINTS: - Suppose that the consumer (household) consumes only two goods (X and Y). Given the Prices of the two goods XP ,YP ) and the consumer’s income (m), the possible quantities purchasable by the consumer (o , o ) are constrained by PXX o P Y om e.g., Suppose that a student has a budget for coffee and milk of \$100/month. If the price of Coffee (X say) is \$1/cup and the price of Milk (Y) is \$2/litre, the budget constraint is \$1*Q + \$2*Q  \$100 C M Note: We can define one of the goods (Y say) as a composite commodity, representing all goods other than X. Budget Line: Definition: The maximum combination of two commodities purchasable by a consumer given the prices of the two commodities and the consumer’s money income Rearranging the budget equation for the assumption that all income is spent gives the Budget line Yo = m/P Y P /X *Y 0 e.g. The budget line for Coffee and Milk with Milk as the Y commodity is  Q M \$100/\$2 – \$1/\$2*Q = 5C – 0.5Q C
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