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Budget Constraints

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.

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A budget constraint is literally what it says it is on its name. A budget that constrains it. It tells us the different combinations of goods we can buy given our income and for two goods is I = PxQx + PyQy. That is, Income is the Price of X time the quantity of X we purchase plus the Price of Y times the quantity of Y we purchase. Or, Income is what we spend on X plus what we spend on Y.

An indifference curve shows the different combinations of goods that yield a certain ...

Solution Summary

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.

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