In: Economics
1. Originally the consumer faces the budget line p1x1 + p2x2 = m. Then the price of good 1 doubles, the price of good 2 becomes 8 times larger, and income becomes 4 times larger. Write down an equation for the new budget line in terms of the original prices and income.
2. What happens to the budget line if the price of good 2 increases, but the price of good 1 and income remain constant?
3. If the price of good 1 doubles and the price of good 2 triples, does the budget line become flatter or steeper?
Thank you!
1. New price of good 1 = 2p1
New price of good 2 = 8p2
New income = 4m
So, new budget line: 2p1 + 8p2 = 4m
2. Vertical intercept of budget line = Income/Price of good
2
Horizontal intercept of budget line = Income/Price of good 1
So, as income and price of good 1 remain constant then horizontal
intercept does not change and as price of good 2 increases then
ratio of income to price of good 2 decline which means vertical
intercept decreases. Thus, budget line becomes
flatter as vertical intercept decreases and
horizontal intercept remains same.
3. New horizontal intercept = Income/2*(price of good 1)
New vertical intercept = Income/3*(price of good 2)
Both horizontal and vertical intercept will decline due to increase
in prices of both goods.
So, decrease in vertical intercept > decrease in horizontal
intercept because increase in price of good 2 is greater than
increase in price of good 1. So, budget line becomes
flatter.