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Question
How does the budget line change if the price of good 2 decreases by a rupee but the price of good 1 and the consumer’s income remain unchanged?
Solution
P1 = Rs 4
P2 = Rs 5
`P_2^1 =` Rs 4
M = Rs 20
Since the income and the price of good 1 are unchanged, the decrease in the price of good 2 will increase the vertical intercept of the budget line. The new budget line will also pivot outwards around the same horizontal intercept.
Horizontal intercept `= M/P_1 = 40/4`
Vertical intercept `=M/P_1 = 40/4`
Slope ` = P_1/P_2 = -4/4=1`
The slope of the new budget line will be more and the new budget line will be steeper than the original one.
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