Answer to Question #191662 in Microeconomics for vania kamal

Question

1.     Suppose that the price of commodity Y is $1 per unit while the price of commodity X is $2 per unit and suppose that an individual’s money income is $16 per time period and is all spent on X and Y. (a) Draw the budget constraint line for this consumer and (b) explain the reason for the shape and the properties of the budget constraint line in part (a).

Answer 1

Solution:

a.). Draw the budget constraint for this consumer:

First derive the budget line:

Budget line: M = PxX + PyY

Where: M = Income = $16

            X = commodity X

            Y = Commodity Y

            Px = Price of commodity X = $2

            Py = Price of commodity Y = $1

Income = 16

Therefore, the budget line is as follows:

M = PxX + PyY

16 = 2X + Y

The budget line constraint is depicted by the below graph:

(b) explain the reason for the shape and the properties of the budget constraint line in part (a).

The shape of the budget line is normally downward sloping. This is because, in order for a consumer to increase the consumption of one product, the consumption of the other product must be reduced while income remains constant.

The properties of the budget constraint are as follows:

·        It has a negative slope – It slopes downward showing an inverse relationship between the purchase of the two commodities.

·        It has a straight line – It is a straight line that denotes the constant market rate of exchange at each combination.

·        Real income line – It operates on the principle of income and the spending capacity of a consumer.

·        Tangent to indifference curve – The indifference curve touches the budget line at a point that is known as the consumer’s equilibrium.