BUS 3000 Lecture Notes - Ceteris Paribus, Tangent, Ordinal Utility

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Suppose that the consumer (household) consumes only two goods (x and y). Given the prices of the two goods (px, py) and the consumer"s income (m), the possible quantities purchasable by the consumer (xo, yo) are constrained by. Pxxo + pyyo m e. g. , suppose that a student has a budget for coffee and milk of /month. Coffee (x say) is /cup and the price of milk (y) is /litre, the budget constraint is. Note: we can define one of the goods (y say) as a composite commodity, representing all goods other than x. 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/py px/py *x0 e. g. the budget line for coffee and milk with milk as the y commodity is. Qm = / /*qc = 50 0. 5qc.

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