Answer to Question #190815 in Economics for Bornface

Question

) Consider John who consumes two goods, (X and Y), with prices 𝑃𝑥 = 𝑁$35, 𝑃𝑦 = 𝑁$25 and income I =N$1500 i) Construct budget constraint [3 marks] ii) Draw John’s budget line with good X on the horizontal axis. [3 marks] iii) Use a graph to show the effect of an increase in income from N$1500 to N$2000. [3 marks] iv) What will happen to the slope of the budget line if the price of good X decreases to N$18? [5 marks]

Answer 1

i) The budget constraint connects the points (42.86; 0) and (0; 60).

ii) John’s budget line with good X on the horizontal axis is a downward-sloping line connecting the points (42.86; 0) and (0; 60) calculated above.

iii) An increase in income from N$1500 to N$2000 will shift the budget line to the right.

iv) The slope of the budget line will decrease if the price of good X decreases to N$18.