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Lecture 1-Budget

The document discusses budget lines and how changes in income or prices affect the quantity of goods that can be purchased. It provides two working examples calculating total income given different bundles of goods that are affordable and how budget equations change with price or income changes.

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Azowad Abrar Jaheen
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18 views11 pages

Lecture 1-Budget

The document discusses budget lines and how changes in income or prices affect the quantity of goods that can be purchased. It provides two working examples calculating total income given different bundles of goods that are affordable and how budget equations change with price or income changes.

Uploaded by

Azowad Abrar Jaheen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Lecture 1

ECO 201/511
Budget Line
Income Change
Change in Income
Price Change
Change in Price
Working Example 1
• Laurel consumes only ale and bread. If she
spends all of her income, she can just afford 20
bottles of ale and 5 loaves of bread. Another
commodity bundle that she can afford if she
spends her entire income is 10 bottles of ale and
10 loaves of bread. If the price of ale is 1 dollar
per bottle, how much is her total income?
Working Example 2
• You have an income of $40 to spend on two commodities.
Commodity 1 costs $10 per unit, and commodity 2 costs $5 per
unit.
• Write down your budget equation.
• Suppose that the price of commodity 1 falls to $5 while
everything else stays the same. Write down your new budget
equation.
• Suppose that the amount you are allowed to spend falls to $30,
while the prices of both commodities remain at $5. Write down
your budget equation.
Rationing
Tax Implications

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