chapter 2: budget constraint

Question 1

composite good

Answer 1

we say that good 2 represents a composite good that stands for everything else that the consumer might want to consume other than good 1.

Question 2

The budget line

Answer 2

The budget line is the set of bundles that cost exactly m:

Question 3

The numeraire

Answer 3

The budget line is defined by two prices and income. What matters for tradeoffs are relative prices.

We can always normalize either income or one of the prices to 1. When we set one of the prices to 1, we refer to that price as the numerair.–

Question 4

The numeraire price

Answer 4

is the price relative to which we are measuring the other
price and income.

Question 5

A lump-sum tax

Answer 5

A lump-sum tax or subsidy gives consumers less or more income.

Question 6

what does the slope of the budget line?

Answer 6

it measures the rate at which the market is willing to substitute good 1 for good 2.

The slope is negative because an increase
in the consumption of 1 good must be offset by a decrease in the consumption
of the other good.

Question 7

Suppose the consumer increases his consumption of x1 by ∆x1.
then …

Answer 7

Any change in the consumption of one good will be offset by a change in the
consumption of the other good of equal value. (see formula)

Question 8

Governments sometimes impose rationing constraints and

Answer 8

fix the level of consumption to be no larger than some amount.

Rationing sometimes happens during a crisis.