Constrained Optimism

Question 1

How are buyers choices constrained

Answer 1

By what they can afford

Question 2

What does the slope of the budget constraint line represent

Answer 2

The maximum amount that can be feasibly afforded by the individual

Question 3

What happens to the budget constraint line if a persons income increases

Answer 3

The gradient of the slope will be unchanged but the entire line will shift further away from the origin

Question 4

What happens to the budget constraint line if the price of one good changes

Answer 4

The gradient and intercept will change relative to the price change

Question 5

What is the formula for budget constraint when taking M to denote income

Answer 5

M=PxX+PyY
Px is the price of good X
Py is the price of good Y

Question 6

How might a quantity discount affect the budget constraint line

Answer 6

The budget constraint line is only linear if the price is constant so if their is a discount at a certain quantity then the gradient will change at that point

Question 7

What happens to the budget constraint line if there is quantity rationing

Answer 7

Sometimes there is a maximum amount which can be brought which means the curve will stop and become vertical at that point meaning it is technically infinite

Question 8

What is the interior solution

Answer 8

Combination of the budget constraint and the Indifference curve - where they cross is what the consumer will actually choose

Question 9

What is the formula for the slope of the budget constraint

Answer 9

∆y/∆x = -(Px/Py)

Question 10

What are Corner Solutions

Answer 10

When the indifference curve is shifted to the right after the point where the maximum quantity of a product has been purchased - individual is willing to trade good x for good y but quantity constraints prevents the trade