Lecture 1 - Budget Set Flashcards
What is the set of possible bundles which are affordable from B(p1, p2, m) ?
B(p1, p2, m) = { (x1, x2) | x1 ≥ 0, x2 ≥ 0, p1x1 + p2x2 ≤ m }
What is the equation for a budget line?
p1x1 + p2x2 = m
What happens to the budget line when income increases or decreases?
the budget line has a parallel shift outwards or inwards, respectively
What happens to the budget line when the price of 1 good increases or decreases?
the gradient of the budget line changes
What is the gradient of the budget line dependent on?
the ratio of p1 to p2
What is meant by the numeraire price?
the price of a good is set to 1, so that the other prices and incomes are scaled around it
What is meant by the numeraire good?
the good associated with the numeraire price
Why can the numeraire price be used?
as only the ratios between prices and income matter
What are objects of consumer’s choices called?
consumption bundles
What do all affordable consumption bundles form?
the budget set
What is meant by an affordable consumption bundle?
those that don’t cost any more than consumer’s income
