My problem lies in reconciling my gross habits with my net income.
Were it not for budget constraints, consumers who prefer more to less would consume unlimited amounts of at least some goods. Well, they can’t have it all! Instead, consumers maximize their well-being subject to their budget constraints. To complete our analysis of consumer behavior, we have to determine the bundle of goods that maximizes an individual’s well-being subject to the person’s budget constraint.
Because Lisa enjoys consuming two goods only, she spends her entire budget on them.11 That is, she chooses a bundle on the budget constraint rather than inside her opportunity set, where she would have money left over after buying ...