Question

Now suppose that income goes up to 15oo. Illustrate how the budget constraint will change. If both goods are normal, explain where the new equilibrium will be (your answer might consist of a region of bundles, rather than just one bundle).

Answer 1

When income rises households wi demand large quantity of normal goods and this will shift the budget line outwards, that is, rightward shift.

In the picture the new equilibrium bundle will be on the line at where the indifference curve is tangent to the budget line.