Constrained Optimisation - Lecture 8 Flashcards
(12 cards)
Feasible set meaning
something we can afford with our income
what buyers can afford depends on:
income
prices of goods
what does budget constraint show
which bundles are just affordable at a given income.
the feasible set consists of all affordable bundles
anything bellow the curve is when not all money is spent
what does the gradient show in the budget constraint curve
it shows the trade off between the goods
what does an outwards shift in the budget constraint mean
an increase in income
or
a decrease in price of the unit prices of both goods
when would the gradient of the budget constraint curve change
when only one good would have a change in price
or
if the goods change in price by different proportions
how can we get the intercept of both goods if there is no numbers
good Y
good X
income M
price of good Y= Py
price of good X= Px
Y intercept= Py/M
X intercept= Px/M
slope= ΔY/ΔX
Budget constraint equations
M=PxX+PyY
PyY=M-PxX
Y=(M/Py) - (Px/Py)X
M= income
Px= price of X
X=quantity of X
Py= price of Y
Y= quantity of Y
slope= ΔY/ΔX= -(Px/Py) = relative price of the 2 goods/ trade off
PxΔX+PyΔY=0
explanation for budget constraints: quantity discount curve
the price of the good changes after a specific amount is brought (e.g. discount) so the one with the discount becomes more desirable
non linear budget constrains curves types
quantity discount
quantity rationing
explanation for quantity rationing curve
after a certain output no more good can be brought causing the curve to go vertically or horizontally as no more of that good can be brought
what is a corner solution
when there is quantity rationing and an individual wants only one good
the indifference curve will be less steep as they are willing to give up less of one good
so where the budget constraint and the indifference curve will cross will be at the Y intercept.
