- To sketch the budget constraint, given prices and income
- To understand how changes in price and income affect the budget constraint
- The equation for the budget constraint is: P1Q1 + P2Q2 = Y,
where P1 is the price of Good 1, P2 is the price of Good 2, Q1 is the quantity of Good 1, Q2 is the quantity of Good 2, and Y is the consumer's income.
- Choose values for the parameters (prices and income).
- Sketch the budget constraint. Indicate the intercepts and slope. [Plot Good 1 (Q1) on the horizontal axis.]
- Click on Gimme Budget Constraint! to confirm your calculations.
- Choose values for prices and income. Sketch the corresponding budget constraint.
Indicate the intercepts and slope.
[Note: Slope equals -P1/P2.]
- "An increase in P1 will cause the horizontal intercept to
rise and the budget constraint to rotate outwards." Anything wrong with
the statement? Provide a sketch.
- A decrease in consumer's income will cause both intercepts to [ rise
/ fall ] and the slope of the budget constraint to
[ increase / decrease / remain unchanged ]. Sketch.
- If Good 2 becomes cheaper, the vertical intercept will
[ increase / decrease / stay the same ] and the budget constraint
will become [ steeper / flatter ]. Sketch.