1. Chapter 2 Budget Constraint
Key Concepts: Budget Set, Budget Line
The slope of the budget line represents how many units of y you have to give up for an additional unit of x,
i.e. the opportunity cost of a unit of x.

6. Chapter 2 Budget Constraint
Suppose there are two goods that a consumer can choose.
We indicate a consumption bundle by (x1, x2).

7. The budget constraint can be expressed as
p1x1 + p2 x2 ≤ m
m is the amount of money the consumer has to spend
(p1, p2) are the prices of the two goods

8. Draw the budget set.

9. Fig. 2.1

10. The slope –p1/ p2
increase one unit of good 1, how many units of good 2 that you have to decrease
p1 = 6, p2 = 3
6/3 = 2
p1 ∆x1 + p2 ∆x2 = 0 and ∆x2/ ∆x1 = –p1/ p2

11. Two goods are often enough.
p1x1 + x2 ≤ m
x2: money spent on all other goods, a composite good

12. Change of the budget line
m↑?

13. Fig. 2.2

14. p1↑?

15. Fig. 2.3

16. m, p1, p2 ↑at the same rate?
only relative prices (in real terms) matter
money illusion

17. We don’t like a pay cut.
But is pay cut really a cut?

18. Sell a house after one year
Adam -23%, Ben -1%, Carl 23%
-25%, 0%, 25%
Most successful?
48% vote for Carl

20. 2500 NTD or 2500 Yen
2500 = 2.5 ramen

21. Rationing on good 1?

22. Fig. 2.4

23. Imposing a consumption quantity tax t on good 1 only when the consumption of good 1 is in excess of x1*?

24. Fig. 2.5

25. Giving some amount of food stamps for free?

26. Fig. 2.6

27. Giving free education subsidy but once you accept, cannot buy more or less

28. AOG
education

29. Only relative prices matter.
Absolute prices don’t matter.
If the budget set is larger, consumers are weakly better off.

30. Chapter 2 Budget Constraint
Key Concepts: Budget Set, Budget Line
The slope of the budget line represents how many units of y you have to give up for an additional unit of x,
i.e. the opportunity cost of a unit of x.