ECON 2300 : AP ECON 2300 F2012 Session 2.doc
4 Dec 2013
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Ch 2: budgetary and other constraints on choice. Budget set and constraint for two commodities x. Two commodities p1x1 + p2x2 = m is x2 = -(p1/p2)x1 + m/p2 so slope is -p1/p2. { (x1,x2,x3) | x1 0, x2 0, x3 0 and p1x1 + p2x2 + p3x3 m} m /p3 x3 m /p1 x1. For n = 2 and x1 on the horizontal axis, the constraint"s slope is -p1/p2. Increasing x1 by 1 must reduce x2 by p1/p2. Opp. cost of an extra unit of commodity 1 is p1/p2 units foregone of commodity 2. +1 the opp. cost of an extra unit of commodity 2 is p2/p1 units foregone of commodity 1. Budget sets & constraints; income and price changes: the budget constraint and budget set depend upon prices and income. What happens as prices or income change: how do the budget set and budget constraint change as income m increases, higher income gives more choice.
