Explanation When the wants and needs of human are unlimited and the budget of an individual is limited, it will lead to a constraint of needs and this constraint occurring due to the limited budget is known as the budget constraint of an individual. Thus, budget constraint is the possible combination of goods and services that is purchased at a given price level with the entire income. The indifference curve is a graphical representation of different combinations of two commodities that provide the same level of satisfaction to the consumer. Since the level of satisfaction is same at every point, the consumer will be indifferent amongst them. The time allotment of the individual is 100 hours, and the one hour wage rates are $12, $16, and $20. When the wage rate is $12 per hour, she can earn $1,200 by using all her 100 hours for work or 100 hours of leisure. Similarly, when the wage rate is $16 per hour, she can earn an income of $1,600 even if she spends all her 100 hours for work or 100 hours of leisure. The wage rate of $20 represents a total income of $2,000. These cases are illustrated on the graph with the help of budget constraints BC1, BC2, and BC3, respectively. When the indifference curves are introduced, the point where the indifference curve intersects with the budget constraint is the point of optimum consumption by an individual...

The budget constraints of the individual.

Principles of Economics (MindTap Course List)

8th Edition

ISBN: 9781305585126

Author: N. Gregory Mankiw

Publisher: Cengage Learning

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Question

Chapter 21, Problem 9PA

To determine

The budget constraints of the individual.

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Recent research confirms that the demand for cigarettes is not only inelastic, but it also indicates that smokers with incomes in the lower half of all incomes respond to a given price increase by reducing their purchases by amounts that are more than four times as large as the purchase reductions made by smokers in the upper half of all incomes. How can the income and substitution effects of a price change help explain this finding?

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