Textbook Notes (368,558)
Canada (161,962)
Economics (708)
Prof (3)
Chapter 4


14 Pages
Unlock Document

Economics 2150A/B

P a g e | 1 Part 2 Utility maximization subject to an income constraint is equivalent to expenditure minimization subject to a utility constraint. 1. In the utility maximization method for finding the optimal consumption bundle, we choose the bundle that allows us to reach the highest level of utility U subject to an income constraint. 2. Likewise, the consumer can choose a level of consumption of X and Y that minimizes expenditure on the two goods subject to a constraint that utility must be at least as high as the a certain utility level, say U=U2. Exogenous: U=U2, Px, Py Endogenous: X, Y, and Expenditure (I) Think of shifting the budget constraint inward to lower income levels until the expenditure line is just tangent to the given utility curve U=U*. This is the optimal consumption bundle. Examples of optimization with different budget constraints *Be able to draw and label the budget constraints in these examples. When analyzing public policy it is often easiest to think of the consumer consuming the good of interest and a composite good H with a price of 1 dollar. Composite good: represents expenditure on all other goods and has a price set at $1.00. If the composite good is on the vertical axis, then the y-intercept of the budget constraint represents both the quantity of the composite good purchased and total income. a. Coupons versus Cash subsidies Composite good, no housing subsidy NOTE: with the composite good y on the y axis 1. sl
More Less

Related notes for Economics 2150A/B

Log In


Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.