Answer to Question #324491 in Microeconomics for pupy

Question

2. A person has $ 100 to spend on two goods X and Y whose respective prices are $3 and $5. (4 points).

A. Draw the budget line.

B. What happens to the original budget line if the budget falls by 25%?

C. What happens to the original budget line if the price of X doubles?

D. What happens to the original budget line if the price of Y falls to $4?

Answer 1

A)

The budget line $\$100=3P_X+5P_Y$

B)The entire budget line shifts inwards. Since real income is reduced, it affects both commodity.

C) If the price of X doubles, the slope of the budget line becomes steeper as the consumer now has to buy less of good X compared to good Y.

D) If the price of Y reduces to $4, then the budget line pivots upward as more of Y is bought.