Make sure you give complete definitions andexplanations for this set of question
ID: 1243974 • Letter: M
Question
Make sure you give complete definitions andexplanations for this set of questions. When dealing with thedecrease in income, you will want to talk about the effects on thebudget constraint and the consumption bundle of the consumer. Remember, there are only two goods in the model!What is a budget constraint? How does a budget constraint explainconsumer 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 yourdiscussion. Make sure you give complete definitions andexplanations for this set of questions. When dealing with thedecrease in income, you will want to talk about the effects on thebudget constraint and the consumption bundle of the consumer. Remember, there are only two goods in the model!
What is a budget constraint? How does a budget constraint explainconsumer 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 yourdiscussion.
Explanation / Answer
A budget contraint is a limit on consumers' consumption due toincome.
A budget constraint explains consumer choices in conjunctionwith indifference curves because indifference curves serve todemonstrate different points at which a consumer, given his or herconstraints, such as a budget constriaint, will decide to consumeto achieve the maximum personal benefit.
When a household has a certain income X it will make purchasesto maximize its benefit desire for goods at a level that it ishappiest. This level of consumption will form its indifferencecurve. When that income is decreased by half then the household'sconsumption choices will be based on a new indifference curve thatis on a new, lower, demand curve due to the decrease in incomewhich has shifted the demand curve, and indifference curve, to theleft
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