The budget constraint Opportunity set The Opportunity set The set of consumption bundles that are affordable .PX+PY<M Budget Line Budget Line The bundles of goods that exhaust a consumers income ·PX+PY=M. Market rate of substitution The slope of the budget line P、/P Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 The Budget Constraint • Opportunity Set  The set of consumption bundles that are affordable. • PxX + PyY  M. • Budget Line  The bundles of goods that exhaust a consumers income. • PxX + PyY = M. • Market Rate of Substitution  The slope of the budget line • -Px / Py Y X The Opportunity Set Px Py Budget Line