Answer to Question #210042 in Microeconomics for Vickie

Question

The the consumer-facing the budget line P1x1+p2x2=M where p1 and p2 price is given as good 1 and 2 and x1 and x2 are quantity demanded for good 1 and 2 respectively,M is consumer income ,if the price of good 1 doubles ,the price of good 2 becomes 5 times larger and incomes becomes 3 times larger , write down an equation for the new budget line in terms of the original prices and income

Answer 1

The consumer would result in the utility maximisation which would be constrained by the total money income with the given price P1 and P2. The consumer would result in the utility maximisation which would result in the Marshallian demand theory of the goods demanded with the given prices and income.

The consumer would result in the change in the quantity demanded of the various goods and services which would result from the changes in the prices and change in the money income. The budget line is negatively sloped and is a function of the prices P1 and P2.

The budge line would result in the total expenditure on the goods x1 and x2 to be equal to the money income as a result the utility maximisation would result in the combination of the goods which would maximise the utility given the income. The utility maximisation outcome would depend on the change in the prices of the goods and commodities.

The budget line would change because of the change in the prices of the commodities. When the price of one good doubles and price of another good becomes five times which would result in the fall in the real income. The income when increasing by 3 times would cause the income to increase by a less amount than the increase in prices as a result the consumer would have a fall in the real income.

Thus, the new budget constraint becomes as follows:

$2P_1X_1+5P_2X_2=3M$

where P1 and P2 are initial prices of the initial goods 1 and 2 and initial money income would be equal to money income M.