Budget Constraints and Household Consumption - Prof. A. Guerdjikova, Study notes of Microeconomics

Download Budget Constraints and Household Consumption - Prof. A. Guerdjikova and more Study notes Microeconomics in PDF only on Docsity! Households Households De…nition Consumption Set The consumption set X is the set of consumption bundles which are physically feasible. Ani Guerdjikova ECON 3130 Fall 2008 40 / 263 Households Example Let good 1 be ”leisure”. There is a maximal upper bound on ”leisure”, e.g. 24/7. 6 - x1 x2 X x̄10 Ani Guerdjikova ECON 3130 Fall 2008 41 / 263 Households The Budget Constraint Income Changes 6 - Z Z Z Z Z Z Z Z Z Z Z Z Z Z x1 x2 y p1 y p2 y 0 < y p1 p2 p1 p2 Z Z Z Z Z Z Z Z Z Z 0 y 0 p1 y 0 p2 Ani Guerdjikova ECON 3130 Fall 2008 44 / 263 Households The Budget Constraint Price Changes 6 - Z Z Z Z Z Z Z Z Z Z Z Z Z Z Z Z x1 x2 y p1 y p2 p < p0 p1 p2 p 01 p2 J J J J J J J J J J J J y p 01 0 Ani Guerdjikova ECON 3130 Fall 2008 45 / 263 Households The Budget Constraint Proportional Price Changes 6 - Z Z Z Z Z Z Z Z Z Z Z Z Z Z Z Z Z x1 x2 y p1 y p2 p 01 p 02 = p1p2 = λ p1 p2 = λ p 01 p 02 = λ Z Z Z Z Z Z Z Z Z Z Z Z 0 y p 01 y p 02 Ani Guerdjikova ECON 3130 Fall 2008 46 / 263 Households The Budget Constraint Income tax (1 t) y 6 - Z Z Z Z Z Z Z Z Z Z Z Z Z Z Z Z x1 x2 y p1 y p1 p1 Z Z Z Z Z Z Z Z Z Z Z 0 y (1t)p1 y(1 t) Ani Guerdjikova ECON 3130 Fall 2008 49 / 263 Households The Budget Constraint Rationing the consumption of good 1 x1  x̄1 6 - Z Z Z Z Z Z Z Z Z Z Z Z Z Z Z Z x1 x2 y p1 y p1 x̄10 Ani Guerdjikova ECON 3130 Fall 2008 50 / 263 Households The Budget Constraint Imposing minimal consumption of good 1 x1  x1 6 - Z Z Z Z Z Z Z Z Z Z Z Z Z Z Z Z x1 x2 y p1 y p1 x10 Ani Guerdjikova ECON 3130 Fall 2008 51 / 263 Households The Budget Constraint Bonus Bonus of z units of money if consumption of good 1 exceeds x̃1 units. 6 - Z Z Z Z Z Z Z Z Z Z Z Z Z x1 x2 y p1 y p1 x̃1 Z Z Z Z Z Z Z Z Z 0 p1 p1 ................. ................................ Z Z Z Z Z Z Z y+z p1 .......... y + z Ani Guerdjikova ECON 3130 Fall 2008 54 / 263 Households The Budget Constraint The budget set for an initial endowment of goods ω1 initial endowment with good 1 ω2 initial endowment with good 2 Budget constraint: p1x1 + p2x2  p1ω1 + p2ω2 6 - Z Z Z Z Z Z Z Z Z Z Z Z Z x1 x2 y p2 p1 p2 p1x1 + p2x2 = p1ω1 + p2ω2 0 y p1 q y := ω1p1 +ω2p2 6 ......................... ...................... ω1 ω2 Ani Guerdjikova ECON 3130 Fall 2008 55 / 263