Draw and label a budget constraint and show it changing due to: A. An increase in...

Draw and label a budget constraint and show it changing due to:

A. An increase in income

B. A decrease in the price of the good on the horizontal axis.

Solutions

Expert Solution

A budget line shows the maximum consumption of a consumer at a given income level. It shifts parallelly when there is a change in income but rotates when the relative prices change. A budget line is also called a budget constraint because it limits

Total consumption possibility of a consumer.

A change in consumer income and the budget line

If consumer income increases then the consumer will be able to purchase higher combinations of goods. Hence an increase in consumer income will result in a shift in the budget line. the prices of the two goods have remained the same, therefore, the increase in income will result in a parallel shift in the budget line.

Assume consumer income increased to Rs 15.So, now he can buy more quantities of both goods.

An Increase in income makes the purchase of more of either one or both items possible.

B. If income is held constant, and the price of one of the goods changes then the slope of the curve will change. If the price of one of the commodity increases, the budget line will move inwards and vice versa.

Decrease in price of one commodity

If the price of one of the commodity decreases, the budget line will move outwards

Here, the price of commodity B had decreased and with the decrease in price, the curve has moved outwards. Lets see the points on x axis only, when we are not buying any units of A. Earlier with Rs 12 and price of B, Rs 1, he was able to buy 12 units of B. With the decrease in price of B from 1 to 0.80 Rs, Now he can can buy 15 units of B.

ekkarill92 answered 1 year ago

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