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Question
Answer the following question:
What is the budget line? Why the budget line is left to right downward sloping?
Solution
Budget Line represents the different combinations of two goods that are affordable and are available to a consumer given his/her level of income and the market prices of the goods. The equation of the budget line is represented as follows.
`P_1X_1+P_2X_2 = M - P_1/P_2` represents the slope of budget line. This is also called the price ratio. The negative sign depicts the negative slope of the budget line from left to right.
The budget line slopes downward from left to right because with a given income, a consumer cannot buy a higher amount of both goods. Rather, to increase the purchase of one good, the consumer will have to reduce the purchase of the second good. Thus, the curve slopes downward.
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RELATED QUESTIONS
Define budget set.
Write a budget line equation of a consumer if the two goods purchased by the consumer, Good X and Good Y are priced at Rs 10 and Rs 5 respectively and the consumer's income is Rs 100.
Find Consumption Expenditure from the following:
|
National Income |
= Rs 5,000 |
|
Autonomous Consumption |
= Rs 1,000 |
|
Marginal propensity to consume |
= 0.80 |
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Explain why the budget line is downward sloping.
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A consumer wants to consume two goods. The prices of the two goods are Rs 4 and Rs 5 respectively. The consumer’s income is Rs 20.
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A consumer wants to consume two goods. The prices of the two goods are Rs 4 and Rs 5 respectively. The consumer’s income is Rs 20.
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A consumer wants to consume two goods. The prices of the two goods are Rs 4 and Rs 5 respectively. The consumer’s income is Rs 20.
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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?
Suppose a consumer can afford to buy 6 units of good 1 and 8 units of good 2 if he/she spends her entire income. The prices of two goods are Rs 6 and Rs 8. How much is the consumer’s income?
Suppose a consumer wants to consume two goods that are available only in integer units. The two goods are equally priced at Rs 10 and the consumer’s income is Rs 40.
(i) Write down all the bundles that are available to the consumer.
(ii) Among the bundles that are available to a consumer, identify those that cost will him/her exactly Rs 40.
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?
Answer the following question.
What can cause a change in the budget line? Explain.
