Question

True or False?

For choice sets emerging from “exogenous” income, the budget line will shift parallel whenever both prices change by the same percentage.

Answer 1

Solution:

False.

The budget line will remain the same or rotate to the left or right depending on which product the consumer prefer.

The budget line will shift parallel whenever a consumer’s income changes but the relative prices of both goods remain constant. If a consumer’s income increases, the budget line will move upwards but will still remain parallel to the original budget line. Similarly, if a consumer’s income decreases, the budget line will move downwards in parallel with the original budget line.