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AP ECON 2300 F2012 Session 2.doc

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York University
ECON 2300
Wai Ming Ho

AP ECON 2300 F2012 Session 2Topic Budget Constraint and PreferenceReading Chapter 2 and 3Ch 2 Budgetary and Other Constraints on ChoiceBudget ConstraintsA consumption bundle containing x units of commodity 1 x units of commodity 2 and so on up to 12x units of commodity n is denoted by the vectorx xxn12nCommodity prices are p p p12nQ When is a consumption bundle x x affordable at given prices p p1n1nQ When is a bundle x x affordable at prices p p1n1nA Whenpxpxm11nnwhere m is the consumers disposable incomeBudget Set and Constraint for Two CommoditiesBudget Set and Constraint for Two Commoditiesx2px px m is1122m p2x ppx mp21212so slope is pp12BudgetSetxm p11 2010 W W NortonCompany Inc14Budget Constraint for Three CommoditiesIf n3 what do the budget constraint and the budget set look likeBudget Set for Three Commoditiesx xxxx0 x0 x0 and 212312 3m ppx px pxm2112233mp3x3mp1x1 2010 W W NortonCompany Inc17For n2 and x on the horizontal axis theconstraints slope is ppWhat does it mean112Increasing x by 1 must reduce x by pp1212Page 1 of 12Budget Constraintsx2Opp cost of an extra unit ofcommodity 1 is ppunits12foregone of commodity 2 Andthe opp cost of an extra1unit of commodity 2 isppppunits foregone2121 of commodity 1 x1 2010 W W NortonCompany Inc22Budget SetsConstraints Income and Price ChangesThe budget constraint and budget set depend upon prices and incomeWhat happens as prices or income changeHow do the budget set and budget constraint change as income m increasesHigher income gives more choiceHigher income gives more choicex2New affordable consumptionchoicesOriginal andnew budgetconstraints areparallel sameslopeOriginalbudget setx1 2010 W W NortonCompany Inc25How do the budget set and budget constraint change as income m decreasesPage 2 of 12
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