1. Chapter 1 Budget Constraint

7. Budget Set and Constraint for Two Commodities x 2 x 1 p 1 x 1 + p 2 x 2 = m is x 2 = -(p 1 /p 2 )x 1 + m /p 2 so slope is -p 1 /p 2 . m /p 1 Budget Set m /p 2

10. How do the budget set and budget constraint change as income m increases? Original budget set x 2 x 1

11. Higher income gives more choice Original budget set New affordable consumption choices x 2 x 1 Original and new budget constraints are parallel (same slope).

12. How do the budget set and budget constraint change as income m decreases? Original budget set x 2 x 1

13. How do the budget set and budget constraint change as income m decreases? x 2 x 1 New, smaller budget set Consumption bundles that are no longer affordable. Old and new constraints are parallel.

15. How do the budget set and budget constraint change as p 1 decreases from p 1 ’ to p 1 ” ? Original budget set x 2 x 1 m/p 2 m/p 1 ’ m/p 1 ” -p 1 ’/p 2

16. How do the budget set and budget constraint change as p 1 decreases from p 1 ’ to p 1 ” ? Original budget set x 2 x 1 m/p 2 m/p 1 ’ m/p 1 ” New affordable choices -p 1 ’/p 2

17. How do the budget set and budget constraint change as p 1 decreases from p 1 ’ to p 1 ” ? Original budget set x 2 x 1 m/p 2 m/p 1 ’ m/p 1 ” New affordable choices Budget constraint pivots; slope flattens from -p 1 ’/p 2 to -p 1 ”/p 2 -p 1 ’/p 2 -p 1 ”/p 2

22. The Food Stamp Program G F 100 100 F + G = 100; before stamps.

23. The Food Stamp Program G F 100 100 F + G = 100: before stamps.

24. The Food Stamp Program G F 100 100 F + G = 100: before stamps. Budget set after 40 food stamps issued. 140 40

25. The Food Stamp Program G F 100 100 F + G = 100: before stamps. Budget set after 40 food stamps issued. 140 The family’s budget set is enlarged. 40

28. Shapes of Budget Constraints with a Quantity Discount m = $100 50 100 20 80 x 2 x 1 Budget Set Budget Constraint

29. Shapes of Budget Constraints with a Quantity Penalty x 2 x 1 Budget Set Budget Constraint

32. More General Choice Sets Food Other Stuff 10 At least 10 units of food must be eaten to survive

33. More General Choice Sets Food Other Stuff 10 Budget Set Choice is also budget constrained.

34. More General Choice Sets Food Other Stuff 10 Choice is further restricted by a time constraint.

35. More General Choice Sets So what is the choice set?

36. More General Choice Sets Food Other Stuff 10

37. More General Choice Sets Food Other Stuff 10

38. More General Choice Sets Food Other Stuff 10 The choice set is the intersection of all of the constraint sets.

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