Answer to Question #159617 in Macroeconomics for Hevin

Question

suppose the consumer wants to consume 2 goods . Price of goods are rs 4 and rs5 respectively . The consumers income is rs 20

write down the equation for budget line

Answer 1

Answer

The consumer has a given income which sets limits to his maximum behavior.

The equation of the lineis

P₁x₁+p₂x₂=M

According to the question

P₁=4, p₂=5

4x+5y=20

Budget set may be

Two combination possible

1) (5,0)

2) (0,4)

4*5+5*0=20

4*0+5*4=20

Another way

The quantity of goodx purchased if whole of the given income 20 is spent on it is ox. Therefore

OX*p_x= 20

$OX=20/4 =5$

Now, the quantity of goody purchased if whole of the given income 20 is spent on it is OY. Therefore,

OY*P = M OR

$OY= 20/5 =4$

Dividing (2) by (1) we have:

$OY/OX =M/P1/M/P2$

$= 20/5*4/20$

$4/5$

$(-) Px/Py$

It is thus proved that the slope of the price line BL represents the ratio of the price of two goods.

Budget line equation

$PxQx+Py Qy =Money income$