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Putting It All Together: Constrained Choice
Putting It All Together: Constrained Choice
Putting It All Together: Constrained Choice
to see two movies. In essence, he is trading the CD for two movies, even though
in reality he accomplishes the trade using money rather than the goods them-
selves. When a persons budget is fixed, if he buys one thing he is, by definition,
reducing the money he has to spend on other things. Indirectly, this purchase
has the same effect as a direct good-for-good trade.
FIGURE 2-6
Quantity of
CDs, QC Budget Constrained Optimization
constraint, Given a utility function of
BC1 U QC
QM , an income of
6 $96, and prices of CDs and
movies of $16 and $8, respec-
tively, Andreas optimal choice is
3 CDs and 6 movies (point A ).
B
This represents the highest
indifference curve she can reach,
A given her resources and market
3 IC3 prices. She can also afford
IC2 points such as B and C, but they
leave her on a lower indifference
IC1
C curve ( IC1 instead of IC2 ).
6 12 Quantity of
movies, QM