Answer to Question #187670 in Microeconomics for bimel rao

Question

1.   Explain the meaning of a budget line?

B.  Explain the effect of the following on the budget line if money income (a) increases and (b) decreases?

C.     Explain the effect of the following on the budget line if the price of the product shown on the horizontal axis (c) increases and (d) decreases?

Answer 1

1.

Budget line is the constraint which the consumer can spend on the consumption of the goods ie the income of the consumer. 

B

(a)

 If money income increases, the budget line shifts outward as the consumer can buy more of the two goods.

(b)

If the money income reduces, the consumption would reduce and hence the budget line shifts inward parallel to the original line. 

This is shown in the graph below. 

In the graph, MN is original budget line and the dotted lines are the parallel shifts due to income change.

PQ shows the case where income increases

CD shows the case where income decreases

C.

(c)

 If the price of the good along horizontal axis increases, then the consumer would have to reduce the units of good consumed and hence the budget line rotates inward on the horizontal axis. 

(d) when the price decreases, the consumer would increase the consumption and the budget line would rotate outward on the axis. 

When price increases of good B, the curve rotates from N to Q while the it reduces, then it rotates from N to P.