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Chapter Two Budget Constraint 预算约束 Structure of chapter 2 2.1 The definition and properties of budget constraint Algebra Graph 2.2. Changes in budget constraint 2.3. Government taxes and their effect on budget constraint. 2.1 The Budget constraint A consumption set （消费集, X） is the set of all consumption bundles （消费组合）that the consumer can conceive. What constrains consumption choice? Consumption Bundle A consumption bundle x=(x1, x2, … , xn) is a vector containing different quantities of each of the n commodities. Non negative constraint: x=(x1, … , xn) | xi 3 0. Budget Constraints Commodity prices are (p1, p2, … , pn). Q: When is a bundle (x1, … , xn) affordable at prices p1, … , pn? A: Budget Constraint Budget constraint shows the bundles of goods that are just affordable given the consumer‘s income and the prices of the goods. Budget constraint: p1x1 + p2x2 = m. Budget Set The consumer’s budget set （预算集）consists of all bundles of goods that the consumer can afford at given prices and income.B(p1, … , pn, m) ={ (x1, … , xn) | x1 3 0, … , xn 3 0 and p1x1 + … + pnxn ￡ m } The budget constraint is the upper boundary of the budget set. Properties of the budget set Intercepts: unaffordable ---the points above the budget line affordable---the points below the budget line just affordable---the points on the budget line Budget line x2 x1 p1x1 + p2x2 = m. m /p2 m /p1 Affordable x2 x1 Budget constraint is p1x1 + p2x2 = m. m /p1 m /p2 Budget Set x2 x1 m /p1 Budget Set the set of all affordable bundles. m /p2 Slope of the budget line x2 x1 slope = -p1/p2. m /p1 Budget Set m /p2 Meaning of the Slope Increasing x1 by 1 unit must reduce x2 by p1/p2. Opportunity cost of consuming x1 Budget Constraints x2 x1 Opp. cost of an extra unit of commodity 1:  Opp. cost of an extra unit of commodity 2: -p2/p1 +1 Example Movies CD’s Slope= - PC /PM: How many extra units of movies a consumer can b