Economics 2150A/B Lecture Notes - Lecture 2: Budget Constraint, Constrained Optimization, Indifference Curve

• School: Western University
• Department: Economics
• Course: Economics 2150A/B
• Professor: Elaine O' Riordan

Document Summary

Budget line - the set baskets given the consumer spends all available income - p_x + p_y = i, can rearrange for y. P_x x + p_y y = i (the constraint) Interior optimum: the optimal consumption basket is at a point where the indifference curve is just tangent to the budget line. Mrs_x,y = mu_x/mu_y = p_x/p_y , rearranged to mu_x/p_x = mu_y/p_y. Budget constraint - the set baskets the consumer may purchase given available income - p_x + Budget line - the set baskets given the consumer spends all available income - p_x + p_y = i, can. Interior optimum: the optimal consumption basket is at a point where the indifference curve is. At this point (optimal basket) you can obtain the equal bang for the buck. If not at the optimal point, either mrs_x,y > p_x/p_y = mu_x/p_x > mu_y / p_y or mrs_x,y. Corner points at ax = by, y = (a/b) * x.