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Budget Constraint
Calculating Income or Consumption from Wage and Hours Worked
The Budget Constraint as an Equation and Inequality
An individual's budget constraint relates consumption (), wage (), and free time (). Although it can be broadly defined by the inequality , which represents the entire feasible set, a key simplification is often made for optimization problems. Because utility is assumed to depend positively on both and (the 'more is better' principle), a rational individual will always choose a point on the feasible frontier rather than inside it. This justifies writing the constraint as a strict equation, , which simplifies the mathematical solution process. This equation plots as a downward-sloping straight line, representing the feasible frontier.
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CORE Econ
Economics
Social Science
Empirical Science
Science
Economy
Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
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Graphical Representation of the Budget Constraint
Zoë's Budget Constraint for Social Activities
Zoë's Consumer Choice Problem with a Fixed Budget
The Budget Constraint as an Equation and Inequality
Karim's Work-Leisure Choice (Figure 3.3)
The Budget Constraint as an Equation and Inequality
Household Budget Constraint (Ana and Luis Model)
Calculating Average Wage from Annual Income and Hours Worked
Calculating Monthly Consumption from Labor Income
An individual currently earns $25 per hour and works 40 hours per week. They are considering two distinct options to increase their weekly income:
Option A: Secure a 10% raise in their hourly wage. Option B: Work 10% more hours per week at their current wage.
Assuming all income is available for consumption, which statement accurately compares the effect of these two options on the individual's weekly consumption capacity?
Calculating Income After a Raise
Comparing Job Offers to Meet a Savings Goal
If an individual's hourly wage is increased by 20% and their weekly hours worked are reduced by 20%, their total weekly income from labor will remain unchanged.
An individual is considering four different part-time job scenarios. Match each job scenario (hourly wage and weekly hours) to the correct total weekly income it would generate.
Evaluating Strategies for Income Growth
Analyzing Job Offer Trade-offs
Two workers, Person A and Person B, have different work arrangements. Person A earns an hourly wage that is double the hourly wage of Person B. However, Person A works exactly half the number of hours per week as Person B. Based on this information, how does Person A's total weekly income from labor compare to Person B's?
Devising a Work Plan for a Financial Goal
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Formulating Karim's Constrained Optimization Problem
Figure 3.7a - Diagram of Karim's Optimal Choice at a €30 Wage
An individual's feasible combinations of daily consumption and free time are represented by all the points on and below a downward-sloping line. A core assumption in consumer theory is that 'more is better,' meaning an individual's satisfaction increases with more consumption and more free time. Given this assumption, why is it logical for an analyst to focus only on the combinations that fall exactly on the line when determining the individual's optimal choice?
Evaluating a Consumption Choice
A combination of consumption and free time is considered 'feasible' only if it lies exactly on the line representing the budget constraint, where consumption equals the wage multiplied by hours worked.
Modeling the Budget Constraint
An individual's feasible set of choices for daily consumption (c) and free time (t) is described by the relationship c ≤ 15(24 - t). They are currently choosing to have 16 hours of free time and $100 of consumption. Assuming this individual always prefers more consumption to less for any given amount of free time, what can be concluded about their current choice?
Evaluating a Modeling Simplification
An economist is modeling the daily choices of an individual who earns a wage of $25 per hour. The individual has 24 hours available each day to allocate between free time (t) and work. The money earned is used for consumption (c). The model is based on the principle that the individual will always want more consumption for any given amount of free time, and more free time for any given amount of consumption. To find the single combination of free time and consumption that maximizes the individual's satisfaction, which mathematical expression should the economist use to represent the budget constraint?
Analyzing Budget Choices
Applicability of the Budget Constraint Model
Analyzing an Individual's Labor-Consumption Decision