Answer to Question #251290 in Microeconomics for queen

Question

In a two-good market, the prices are (p₁, p₂) = (4, 2), and the consumer starts with an initial endowment of (ω₁, ω₂) = (3, 7). Which of the following would best describe a change in the consumer's endowment to (ω₁, ω₂) = (5, 1)? 

Choose one:

A. There has been a decrease in the value of the endowment, shifting the budget line to the left. 

B. There has been an increase in the value of the endowment, shifting the budget line to the left.

C. There has been a decrease in the value of the endowment, shifting the budget line to the right.

D. There has been an increase in the value of the endowment, shifting the budget line to the right.

Answer 1

C. There has been a decrease in the value of the endowment, shifting the budget line to the right.

When there is a decrease in the value of endowment, it means that the value of the product that is already owned is not as much as the value of the product being sold, hence more will be spent on the product to be bought, and this implies an increase in budget denoted by a shift in the budget line to the right.