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Budget Constraint
Dr. Roberto Veneziani
ECN 111 Microeconomics 1
Lecture 1
1
Aim
Overview the theory of consumer behaviour
Objectives
Become familiar with the maximisation of
utility using indifference curves and budget
constraints to model consumer choice
Grasp the concepts of market demand and
elasticities
Understand how we can expand this
framework to consider choice over time
Understand how demand and supply are
brought together to determine price and
quantity in a market
Topics
Week
Week
Week
Week
Week
Week
Week
Week
Week
Week
Week
Week
Textbooks
H. Varian, Intermediate Microeconomics,
Norton, 9th ed., 2014
Available from campus bookstore
Assessment
Two tests during the semester.
They will count 30% towards your
overall mark for the course.
There will be a final exam. The
final exam takes the form of a twohour paper and is counting for 70%
of the overall course mark.
Problem Sets
There will be weekly problem sets.
We will go over the solutions in classes.
SOLUTIONS WILL NOT BE POSTED ON THE
WEB, SO COME TO CLASS!
If you miss a class, then ask classmates for
solutions, come to office hours to review
questions you had trouble with, ask in the next
class if time permits.
Office Hours
I will have office hours on Tuesdays
15:00-17:00 in W308. Please feel free
to stop by!
If you have questions and absolutely
cannot make the scheduled office
hours, then please email me. I am
pretty good with email and will
respond as soon as possible.
9
Decision
10
Budgetary Constraints
(Varian, chap.2)
11
12
Budget Constraints
Assumptions
Budget Constraints
Assumptions
Budget Constraint
Amount spent = Amount earned
(income).
Budget constraint for two
commodities:
p1x1 + p2x2 = m
m /p1
x1
16
Budget constraint is
p1x1 + p2x2 = m.
m /p1
x1
17
Budget constraint is
p1x1 + p2x2 = m.
Just affordable
m /p1
x1
18
Budget constraint is
p1x1 + p2x2 = m.
Not affordable
Just affordable
Affordable
m /p1
x1
19
Budget constraint is
p1x1 + p2x2 = m.
Budget
Set
x1
20
x2
m /p2
p1x1 + p2x2 = m is
x2 = m/p2 -(p1/p2)x1
so slope is -p1/p2.
Budget
Set
m /p1
x1
21
22
23
2B + 1.5C = 20
2B + 1.5C = 10
1.5B + 2C = 20
None of the above
24
10
13.33
1.5
2
25
0.75
1.333
2
None of the above
0%
0%
0%
0%
26
Original
budget set
x1
27
m/p2
-p1/p2
Original
budget set
m/p1
m/p1
29
x1
m/p2
New affordable
choices
-p1/p2
Original
budget set
m/p1
m/p1
30
x1
m/p2
New affordable
choices
Budget constraint
-p1/p2
pivots; slope flattens
from -p1/p2 to
Original
-p1/p2
-p1/p2
budget set
m/p1
m/p1
31
x1
BC2 price of x2
increases
BC3 price of x2
x2decreases
BC2 price of x1
increases
BC3 price of x1
x2
decreases
BC3
BC2
BC1
BC3
BC1
BC2
x1
x1
32
34
35
m
p2
p1x1 + p2x2 = m
m
p1
36
x1
m
p2
m
(1 t ) p2
p1x1 + p2x2 = m
p1x1 + p2x2 = m/(1+t)
m
(1 t ) p1
m
p1
37
x1
39
40
Rationing Constraints
Consumption of some
good is fixed to be no
larger than some
amount
x2
Original
budget set
x1
41
Rationing Constraints
Part of the budget
x
set gets lopped off. 2
New
budget
set
x1 *
x1
42
100
F
44
40
100 140
F
45
100 140
F
46
120
100
40
100 140
F
47
48
100
m=
Slope = - 2 / 1 = - 2 $100
(p1=2, p2=1)
Slope = - 1/ 1 = - 1
(p1=1, p2=1)
20
50
x1
80
49
100
m=
Slope = - 2 / 1 = - 2 $100
(p1=2, p2=1)
Slope = - 1/ 1 = - 1
(p1=1, p2=1)
20
50
80
Buy first 20 units at $20 each and
50
next 60 units at $1 each.
x1
m=
$100
100
Budget Constraint
Budget Set
20
50
x1
80
51
Budget
Constraint
Budget Set
Slope increases, as x1
becomes relatively
more expensive with
large quantity.
x1
x2 = 2x1 + 10
Budget constraints slope is
-p1/p2 = -(-2)/1 = +2
10
x1
54
10
Budget set is
all bundles for
which x1 0,
x2 0 and
x2 2x1 + 10.
x1
55