Economics 2150A/B Lecture Notes - Lecture 1: Indifference Curve, Budget Constraint

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ECON 2150A/B Full Course Notes

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Chapter 4 consumer choice (up to page 115) Budget line set of baskets that a consumer can purchase when spending all of his/her available income. Intercepts of budget line are (x intercept = i/px y intercept = i/py) Slope of budget line = (change in y/change in x) How many units of y must be given up to get an additional unit of x. Budget constraint set of baskets that a consumer can purchase with a limited amount of income. Pxx + pyy less than or equal to 1. Increase in income shifts budget line outward in a parallel fashion (expanding set of choices) Decrease in income shifts budget line inward (reducing set of choices available) Increase in the price of one good moves intercept on that good"s axis towards the origin. Decrease in price of one good moves intercept on that good"s axis away from the origin. Increase in income or decrease in price = increases purchasing power.

Related Questions

Consider an individual making choices over two goods, x and y with prices px and py, and who has income:

Suppose that, as a result of changes in the individual's economic circumstances, the budget line rotates outward, with the vertical (good y) intercept remaining unchanged but the horizontal (good x) intercept shifting to the right. Explain how this could have happened if the price of good x did not change?

If the individual's utility function is u(x; y) = x 2 + 4y 2 , are these preferences convex? Are they monotonic? Explain.

coffeegnu443

True or False. If False explain why it's false.

1. If all prices are doubled an money income is the left the same, the budget set does not change because the relative prices do not change.

2. A decrease in income pivots the budget line around the bundle initially consumed.

3. If preferences are well-behaved, then for any commodity bundle (x1,x2), the set of commodity bundles that are worse than (x1,x2) is a convex set.

4. The marginal rate of substitution measures the distance betwee one indifference curve and the next one.

5. If someone has the utility function U= 2min(x, y), then x and y are perfect complements for that person.

6. At the boundary optimum, a consumers indifference curve must be tangent to her budget line.

7. If two goods are substitutes, then an increase in the price of one of them will increase the demand for the other.

8. An Engel curve is a demand curve with the vertical and horizontal axes reversed.

9. An inferior good is less durable than a normal good.

10. When other variables are held fixed, the demand for a Giffen good rises when income increase.

A consumer is in equilibrium at point A in the diagram below. The price of good X is $5.

A. What is the price of good Y?
$____________

B. What is the consumer's income?
$____________

C. At point A, how many units of good X does the consumer purchase?
_________ units

D. Suppose the budget line changes so that the consumer achieves a new equilibrium at point B. What change in the economic environment led to this new equilibrium?

a. The price of good X decreased to $2.50.

b. The price of good Y increased to $10.

c. The price of good Y decreased to $2.50.

d. The price of good X increased to $10.

E. Is the consumer better off or worse off as a result of the price change?

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Economics 2150A/B Lecture Notes - Lecture 1: Indifference Curve, Budget Constraint

ECON 2150A/B Full Course Notes

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