Question

In: Economics

Detail the theory of budget constraint with an example of your budget constraint.

Detail the theory of budget constraint with an example of your budget constraint.

Solutions

Expert Solution

A budget constraint represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income. Consumer theory uses the concepts of a budget constraint and a preference map to analyze consumer choices. In the budget constraint, there are prices of the goods, the quantity of the goods on one side and total income as the constraint on the other side.

For example, the budget constraint concept is most easily explained via an example. Suppose that the price of beer is $2 and the price of pizza is $3. Furthermore, assume that the consumer has $18 available to spend. The amount spent on a beer can be written as 2B, where B is the number of beers consumed. In addition, the spend on pizza can be written as 3P, where P is the quantity of pizza consumed. The budget constraint is derived from the fact that the combined spending on beer and pizza cannot exceed the available income. The budget constraint is then the set of combinations of beer and pizza that yield an overall spend of all of the available income, or $18.


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