Using a real world example, define and apply the Budget Constraint Model to consumer decision making.

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Expert Solution

Hi,

Budget constraint is something which shows the choice of consumer's maximum utilisation of available resources je or she made(here resources denotes to his or her income) as we can take an example of any two choices available out in the real world.

Lets say : we are going to face summer very soon and we may need something to chill in that season, now consumer A has a budget of 250 INR to spend in total, here he/she wants to drink coke and have ice cream both, he or she found the price available at that moment at 25 per bottle and 50 each cup .

Now put value for coke count as 25C and for ice cream as 50I

So your budget constraint should be : 25C+50I=250

What he can do at 250 with available peoducts

Can buy 10 coke = 250/25

Can buy 5 cup of icecream = 250/50

But in both cases he/she will enjoy taste of anu one product, so in order to uttar the budget at maximum he will distribute the budget in two different products to get the maximum satisfaction at that time.

For me I don't like ice cream much si I can make a decision wise per my choice to buy , 2 cup of icecreams and 6 cokes so o can have one or two and store the rest for the guests.

You can refer the diagram from the book and put both goods at any side X axis or U axis respectively to better lut your own choice of buying the product s

Rahul Sunny answered 1 year ago

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