G021 Microeconomics Lecture notes

The consumption set X is the set of all conceivable consumption bundles q, usually identified with R+ The budget set B ⊂ X is the set of affordable bundles In standard model individuals can purchase unlimited quantities at constant prices p subject to total budget y. The budget set is the Walrasian, competitive or linear budget set: B = {q ∈ R+|pq ≤ y} Notice this is a convex, closed and bounded set with linear boundary p′q = y. Maximum affordable quantity of any commodity is y/pi and slope dqi/dqj |B = −pj/pi is constant and independent of total budget. In practical applications budget constraints are frequently kinked or discontinuous as a consequence for example of taxation or non-linear pricing.