Answer to Question #211294 in Microeconomics for hawalul

Question

(ii)The consumer faces the budget line P₁X₁ + P₂X₂= M where P₁ and P₂ are price for good 1 and 2 and X₁and X₂ are quantity demanded for good 1 and good 2 respectively , Mis consumer income. If the price of good 1 doubles, the price of good 2 becomes 5 times larger, and income becomes 3 times larger, write down an equation for the new budget line in terms of the original prices and income.

Answer 1

Solution:

The budget line is P₁X₁ + P₂X₂= M where P₁ and P₂ are prices of commodities 1&2 and X₁and X₂ are the quantities demanded for goods 1&2 respectively.

When Price of good 1 doubles the equation becomes: 2( P₁X₁) + P₂X₂= M

When Price of good 2 increases five fold the equation becomes: 2( P₁X₁) + 5(P₂X₂)= M

When Income of consumer increases three fold the equation become: 2( P₁X₁) + 5(P₂X₂)=3(M)

Answer:

Thus, the new budget constraint becomes as follows:

2P₁X₁+5P₂X₂=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.