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Budget constraints

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1. What is a budget constraint? How does a budget constraint explain consumer choices when used in conjunction with indifference curves? Explain what happens if a household looses half of their income, using a budget constraint and indifference curves in your discussion.

2. There are 168 hours in a week. Of these, about 60 hours will go to sleeping (more or less). That leaves 108 hours for which we have a choice in terms of how we will spend that time. Letâ??s assume that we will spend the 108 hours in either work or leisure, or some kind of combination of the two.

A. What factors would you consider in making the choice of how you will allocate your time between work and leisure?
B. Would these factors change as your earnings increased? As you aged?

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Solution Summary

The budget constraint is analyzed along with the indifference curve.

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Budget Constraint/Indifference Curve

At commodity bundle A, which consists of only apples and oranges, Annette's marginal utility per dollar spent on apples is 10 and her marginal utility per dollar spent on oranges is 8. Diagram a representative budget constraint and indifference curve that passes through bundle A given Annette's budget is exhausted at bundle A. Is Annette maximizing utility? Why or why not? If she is not, what could she do to increase her level of satisfaction?

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