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Question
Suppose a consumer whose budget is ₹ 500, wants to consume only two goods, Good X and Good Y. The goods are respectively priced at ₹ 50 and ₹ 25.
Answer the following questions on the basis of the given information:
(a) State the budget equation of the consumer.
(b) What is the slope of the budget line?
(c) How many units can she purchase if she spends the entire ₹ 500 on Good X?
(d) How many units can she purchase if she spends the entire ₹ 500 on Good Y, given that the price of good Y has doubled?
Solution
Given:
Budget or Income (M)= ₹500
Price of Good X (Px) = ₹50
Price of Good Y (Py) = ₹ 25
(a) The budget equation of the consumer:
Px.X + Py.Y = M
Putting all the values in the given equation:
50X +25Y = 500 (Budget Equation)
(b) The slope of the budget line is `-"P"_"x"/"P"_"y" = - (50)/(25) = -2`
(c) Units of Good X when entire income is spent on Good X implies that Y = 0. Putting the values in the budget equation we get,
50X + 25(0) = 500
50X = 500
X = 10 units
(d) Units of Good Y when entire income is spent on Good Y implies that X = 0 and also Py has doubled implies that Py = ₹50.
Putting all the values in the budget equation we get,
50(0) + 50(Y) = 500
50Y = 500
Y = 10 units
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