![]() Learning Objective 3.4: Illustrate how coupons, vouchers, and taxes alter the budget constraint and budget line.īudget constraints can change due to changes in prices and income, but let’s now consider other common features of the real-world market that can affect the budget constraint.Budgeting Percentage Guidelines for Living Expenses | How Much to Budget for Cost of Living in Canada Figure 3.4 A customer with more resources can spend more, and the line experiences an outward shift. Thus the shift in the budget line is a parallel shift outward-the consumer with the additional income can afford more of both (as displayed in figure 3.4). Mathematically, the total amount the consumer spends on two goods, A and B, is Note that we are focusing on bundles of two goods so that we maintain tractability (as explained in chapter 1), but it is simple to think beyond two goods by defining one of the goods as “money spent on everything else.” So we have to consider all possible bundles-including consuming none at all. It is also true that you could spend less than $5 and have money left over. This table shows the possible combinations of energy bars and vitamin water the student can buy for exactly $5: Table 3.1 Combinations of energy bars and vitamin water Number of Energy bars If you have $5 to spend, energy bars cost fifty cents each, and vitamin water costs $1 a bottle, then you could buy ten bars and no vitamin water, no bars and five bottles of vitamin water, four bars and two vitamin waters, and so on. Suppose you go to the campus store to purchase energy bars and vitamin water. So what can a consumer afford? Answering this depends on the prices of the goods in question. For now, we do not worry about where this money or income comes from we just assume a consumer has a budget. We assume that the consumer has a budget-an amount of money available to spend on bundles. The budget constraint is the set of all the bundles a consumer can afford given that consumer’s income. Learning Objective 3.1: Define a budget constraint conceptually, mathematically, and graphically. Learning Objective 3.5: The Hybrid Car Tax Credit and Consumers’ Budgets 3.1 Description of the Budget Constraint Learning Objective 3.4: Illustrate how coupons, vouchers, and taxes alter the budget constraint and budget line. Learning Objective 3.3: Illustrate how changes in prices and income alter the budget constraint and budget line. ![]() Learning Objective 3.2: Interpret the slope of the budget line. What are some of the budget implications for a consumer who owns a hybrid car? What purchase decisions might this consumer make given their savings on gas, and how does this, in turn, affect the goals of the tax subsidy policy?.The budget constraint is governed by income on the one hand-how much money a consumer has available to spend on consumption-and the prices of the goods the consumer purchases on the other. This is why the budget constraint is called a constraint. Any additional money spent on gasoline is money that is not available for other goods and services and vice versa. In our policy example, an individual’s choice between consuming gasoline and everything else is constrained by their current income. Economists call this limit a budget constraint. Each of us has a budget that limits the extent of our consumption. This has implications for both the individual consumer and the larger economy.Įven the richest people-from Bill Gates to Oprah Winfrey-can’t afford to own everything in the world. ![]() For instance, a consumer that purchases a hybrid car could spend less money on gas and have more money to spend on other things. The US government policy of extending tax credits toward the purchase of electric and hybrid cars can have consequences beyond decreasing carbon emissions. ![]() Hybrid Car Purchase Tax Credit-Is It the Government’s Best Choice to Reduce Fuel Consumption and Carbon Emissions?
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