) Consider John who consumes two goods, (X and Y), with prices ππ₯ = π$35, ππ¦ = π$25 and income I =N$1500 i) Construct budget constraint [3 marks] ii) Draw Johnβs 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]
i) The budget constraint connects the points (42.86; 0) and (0; 60).
ii) Johnβs 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.
Comments
Leave a comment