Chapter 2 Budget Constraint ost of the material here is pretty straightforward. Drive home the formula he slope of the budget line, emphasizing the derivation on page 23. Try some different notation to make sure that they see the idea of the budget line, and dont just memorize the formulas. In the workbook, we use a number of different choices of notation for precisely this It is also worth pointing out that the slope of a line depends on the(arbitrary)choice of which variable is plotted on the vertical axis. It is surprising how often confusion arises on this Students sometimes have problems with the idea of a numeraire good. They understand the algebra, but they don't understand when it would be used. One nice example is in foreign currency exchange. If you have English pounds and American dollars, then you can measure the total wealth that you have in either tw In the workbook, students sometimes get thrown in exercises where one of the goods has a negative price, so the budget line has a positive slope. This comes from trying to memorize formulas and figures rather than thinking about the problem. This is a good exercise to go over in order to warn students about the dangers of rote learning Budget Constraint A. Consumer theory: consumers choose the best bundles of goods they can afford 1. this is virtually the entire theory in a nutshell 2. but this theory has many surprising consequences B. Two parts 1."can afford"-budget constraint 2.“best”- according to consumers' preferences4 Chapter Highlights Chapter 2 Budget Constraint Most of the material here is pretty straightforward. Drive home the formula for the slope of the budget line, emphasizing the derivation on page 23. Try some different notation to make sure that they see the idea of the budget line, and don’t just memorize the formulas. In the workbook, we use a number of different choices of notation for precisely this reason. It is also worth pointing out that the slope of a line depends on the (arbitrary) choice of which variable is plotted on the vertical axis. It is surprising how often confusion arises on this point. Students sometimes have problems with the idea of a numeraire good. They understand the algebra, but they don’t understand when it would be used. One nice example is in foreign currency exchange. If you have English pounds and American dollars, then you can measure the total wealth that you have in either dollars or pounds by choosing one or the other of the two goods as numeraire. In the workbook, students sometimes get thrown in exercises where one of the goods has a negative price, so the budget line has a positive slope. This comes from trying to memorize formulas and figures rather than thinking about the problem. This is a good exercise to go over in order to warn students about the dangers of rote learning! Budget Constraint A. Consumer theory: consumers choose the best bundles of goods they can afford. 1. this is virtually the entire theory in a nutshell 2. but this theory has many surprising consequences B. Two parts to theory 1. “can afford” — budget constraint 2. “best” — according to consumers’ preferences