topic 2 - budget constraint

Question 1

what is the budget constraint

Answer 1

shows all the combinations of goods a consumer can afford with their income

p1x1 + p2x2 <= m

p - prices of 2 goods, x - quantiies of 2 goods, m - total income

Question 2

the budget line

Answer 2

its the graph of the budget constraint, shows all the combinations of goods you can buy if you spend your entire income

slope is -p1/p2

Question 3

how does budget line change?

change in income

Answer 3

if income increases, the line shifts outwards and you can afford more (opposite)

Question 4

how does budget line change?

change in prices

Answer 4

if the price of one good rises, line goes inward (opposite)

Question 5

budget line and oppurtunity cost

Answer 5

the slope of the budget line shows the opportunity cost, how much of one good you have to give up to get more of other

Question 6

composite goods

Answer 6

instead of 2 good we think of one specific good and something else

Question 7

how do economsist represent income?

Answer 7

economsist often measure income in terms of numeraire, a unity of mmeasuruement for prices and income

setting price of “everything else” to 1

Question 8

taxes

Answer 8

a tax on a good increases its price making the budget line inward

Question 9

subsidies

Answer 9

a subsidy decreases a good price making it outward

Question 10

rationing

Answer 10

if a good is rationed you can only buy a limited amount resticitring your choices