Question

assume that food is measured on the horizontal axis and clothing on the vertical axis. if the price of food increases relative to that of clothing, the budget line will....

a- become flatter

b- becom steeper

c- shitf outward

d-become steeper or flatter depending on the relationship between price and income.

e- none of the above

Every optimal choice point

- Indicates a point on the income consumption curve

- represents tangency

- maximizes demand

- all if the above

if the quantity of good A (Qa) is plotted along the vertical asix, the quantity B (qb) is plotted along the horizontal axis, the price of good A is Pa, the price of good B is Pb and the consumer's income is I, then the slope of the consumer's budget constraint is?

a) - Qa/Qv

b) - Qb/Qa

c) -Pb/Pa

d) I/Pa or I/Pb

Answer 1

Budget line is the line which shows the consumption of two goods, which can be purchased with given level of income and prices of two goods. If price of one good rises, in this case 'food', the budget line will rotate left as less food can be purchased with given level of income and will become steeper than before.

It can be shown with the help of following diagram:

So, the correct option is b) become steeper.

Optimal choice point is the point where ability to buy meets willingness to pay. It represents the tangency of budget line to the indifference curve. It can be seen in the following diagram:

So, the correct option is b) represents tangency.

Budget line slopes downward because with given consumer income and prices of two goods, consumer can buy more of good-X only when he buys less of good-Y. Its slope is constant which is shown by prices of two goods. It will be written as (-) Price of good-B / Price of good-A.

So, the correct option is c) -Pb/Pa.