Answer to Question #222333 in Microeconomics for Zeki

Question

Graphically explain:
a) The effect of increase in price of Y on the budget line when price of X and income are
constant.
b) The effect of decrease in price of Y on the budget line when price of X and income of
the consumer remain constant.

Answer 1

Solution:

a.). When there is a price increase of Y on the budget line when the price of X and income are constant, the budget line will rotate inward by shifting to the left to the new position BL₁ since consumers will purchase less of good Y.

 

This is depicted by the below graph:

 

 

b.). When there is a price decrease of Y on the budget line when the price of X and income are constant, the budget line will rotate outward by shifting to the right to the new position BL₂ since consumers will purchase more of good Y.

 

This is depicted by the below graph: