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budget line - indicates all combinations where total spent is equal to income

• I = P_A A + P_B B
• slope = negative ratio of prices of 2 goods
• intercepts on the graph represent how much of each good you could buy if you only bought that certain good
• income change >> changes vertical/horizontal intercepts, not slope
  • increase >> shifts outward; decrease >> shifts inward
  • income consumption curve positive >> normal good (quantity increases w/ income)
  • income consumption curve negative >> inferior good (less desire w/ increased income, ex. hamburger vs steak)
• price change >> slope change (or none if both prices change by same rate)
  • changes intercept of one of the axes (or both of both prices changed)
  • may not change consumption of other good
• purchasing power - determined by income and prices

• original budget line
• possible income changes
• possible price changes
• both price changes could change in such a way that it appears to be an income change (increase in purchasing power through either income increase or price decrease)

maximizing basket - must fulfill 2 conditions 

• (1) located on budget line - can’t go past budget line, can’t leave income unused
  • assuming that satisfaction from goods now exceeds saving income for goods later
  • can’t spend more, can’t spend less
• (2) must give consumer more preferred combination of goods
  • goes w/ the highest indifference curve
• satisfaction maximized where marginal rate of substitution (MRS) equal to ratio of prices
  • marginal benefit = marginal cost
  • MRS = P_A/P_B = -DB / DA
  • if MRS doesn’t equal P_A/P_B, than utility can be increased
• corner solutions - when 1 good is not consumed at all.
  • in this case, MRS doesn’t necessarily equal price ratio (only holds true when positive quantities of goods are consumed)
  • restrictions can change shape of budget line

• most satisfying basket lies on the intersection between the indifference curve offering the highest good and the budget line
• indifference curves found through utility function
• can use both the budget line formula and given utility function to find most satisfying basket