Taimoor Dar

at Pearson Education, Inc

• January 2001 to January 2005

Budget Constraints
The Budget Line
Indicates all combinations of two
commodities for which total money spent
equals total income
We assume only 2 goods are consumed, so
we do not consider savings
Chapter 3 2©2005 Pearson Education, Inc.
The Budget Line
Let F equal the amount of food
purchased, and C is the amount of
clothing
Price of food = PF and price of
clothing = PC
Then PFF is the amount of money spent
on food, and PCC is the amount of money
spent on clothing
Chapter 3 3©2005 Pearson Education, Inc.
ICPFP CF =+
The Budget Line
The budget line then can be written:
All income is allocated to food (F) and/or clothing

• January 1983 to January 1989

If the MRS is, in fact, significantly greater
than the price ratio, then a small
decrease in the price of frozen yogurt will
not alter the consumer’s market basket

• to

consumption moves along a budget
line from the intercept, the consumer
spends less on one item and more on the
other
The slope of the line measures the
relative cost of food and clothing
The slope is the negative of the ratio of
the prices of the two goods
Chapter 3 8©2005 Pearson Education, Inc.
The Budget Line pp. 79 - 83
The slope indicates the rate at which the
two goods can be substituted without
changing the amount of money spent
We can rearrange the budget line
equation to make this more clear