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Question
How does the budget line change if the consumer’s income increases to Rs 40 but the prices remain unchanged ?
Solution
M2 = Rs 40
P1 = Rs 4
P2 = Rs 5
Initial equation of the budget line:
4x1 + 5x2 = 20
New equation of the budget line:
4x1 + 5x2 = 40
As M has increased, the consumer can now purchase more of both the goods and the budget line will shift parallelly outwards to A’B’ from AB.
Horizontal intercept will be `= M/P_2 = 40/4 = 10`
Vertical intercept will be `= M/P_2 = 40/5 = 8`
The slope of the new budget line will be the same as that of the old budget line.
`-P_1/P_2 = 4/5`
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