pumps, it was larger than most, but otherwise typical of the modern urban self-serve station. In April of that year, a major oil supply interruption occurred in the Mideast, which sent gasoline prices skyrocketing. To keep prices from rising further, the Carter administration implemented a complex system of fuel allocations and price controls. One result was that many urban markets got substantially less gasoline than motorists wanted to buy at the regulated prices. At the station outside my

the consumer’s income is M ϭ $100/wk, all of which she spends on some combination of food and shelter. (Note that income is also a flow.) Suppose further that the prices of shelter and food are PS ϭ $5/sq yd and PF ϭ $10/lb, respectively. If the consumer spent all her income on shelter, she could buy M͞PS ϭ ($100/wk) Ϭ ($5/sq yd) ϭ 20 sq yd/wk. That is, she could buy the bundle consisting of 20 sq yd/wk of shelter and 0 lb/wk of food, denoted (20, 0). Alternatively, suppose the consumer spent all

represented as a straight line in the X, Y plane, as shown in Figure 3.5. Because the price of a unit of the composite good is $1, a consumer who devotes all his income to it will be able to buy M units. All this means is that he will have $M available to spend on other goods if he buys no X. Alternatively, if he spends his entire income on X, he will be able to purchase the bundle (M͞PX, 0). Since the price of Y is assumed to be $1/unit, the slope of the budget constraint is simply ϪPX. As

given an additional 14 lb of food. But the slope of the budget constraint tells us that by giving up 1 sq yd of shelter, he can purchase an additional 21 lb of food. Since this is 14 lb more than he needs to remain equally satisfied, he will clearly be better off if he purchases more food and less shelter than at point E. The opportunity cost of an additional pound of food is less than the benefit it confers. EXERCISE 3.6 Suppose that the marginal rate of substitution at point A in Figure 3.15 is

tangency between the intertemporal budget constraint and an indifference curve. Because the slope of the intertemporal budget constraint exceeds 1 when r Ͼ 0, consumers exhibit positive time preference in equilibrium, irrespective of the shape of their indifference curves. • An important application of the intertemporal choice model is to the study of decisions about how much to save. The permanent income and life-cycle hypotheses employ the model to demonstrate that it is the present value of