Answer to Question #276393 in Microeconomics for Muskan

Question

Suppose that the price of commodity Y is $1 per unit while the price of commodity X is $2 per unit and suppose that an individual’s money income is $16 per time period and is all spent on X and Y. (a) Draw the budget constraint line for this consumer and (b) explain the reason for the shape and the properties of the budget constraint line in part (a).

Answer 1

The budget constraint usually takes the form

$M=Px+Py$

Where :

M=Income

P=Price

x and y are the products.

In ths case, the budget constraint will be,

$16=2X+Y$

a. To draw the budget constraint line, we determine both X and Y intercepts

$16=2X+Y$

$X=8-0.5Y$

Therefore X intercept is 8

$16=2X+Y$

$Y=16-2X$

and Y intercept is 16

The budget constraint for the consumer is therefore a staright line cutting through Y at 16 and X at 8.

b. The budget constraint equation is a linear equation therefore justifying the linear shape of the budget constraint line. The slope of the graph is is $-0.5$ implying that product X is twice as costly as product Y.