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**preview**shows half of the first page. to view the full**2 pages of the document.**Topic 3 - Budget Constraints

(Lecture 2 Sept 21st)

๏ฌ Intuition:

1. Goods: x1, x2;

2. Price: p1, p2

3. E: total expenditure/budget the individual has;

Assume that all of E is spent, E = p1x1 + p2x2 ๏ ๎ ๎ซ ๎ต๎ณ

๎๎ซ๎ต๎๎ซ

๎๎ซ๎ ๎ซ

Y-intercepts: ๎ณ

๎๎ซ = maximum units of x2 that can be consumed;

Slope: ๎ต๎๎ซ

๎๎ซ = OC = Units of x2 that have to be reduced to consume one more unit of x1;

-- Change in Variables:

x2 x2 x2

x1 x1 x1

E๎ shifts outward p1๎ steeper p2๎ flatter

-- Non-linear Constraint budget x2

Liner budget constraint = assumption that prices are fixed;

In the real world, there might be non-linearity of prices

e.g. price of electricity depends on usage

x1<a, p1;

x1>a,2p1;

x2,p2 a x1

๏ฌ Inter- temporal Budget Constraint

Assume Y1,Y2 โincomeโ in two periods;

x1p1 + x2p2 = Y1+Y2 ๏ x1 = ๎๎ซ๎ฌพ๎๎ซ

๎๎ซ ๎ต๏บ๎ ๎ซ๎๎ซ๏ป

๎๎ซ

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