Leyla consumes goods X and Y. The price of good X is Px and the price of good Y is Py, Leyla s...
Question:
Leyla consumes goods X and Y. The price of good X is {eq}P_x {/eq} and the price of good Y is {eq}P_y {/eq}, Leyla's income is I. If both prices and Leyla's income decrease by 50%, then the
A) slope of the budget constraint will decrease.
B) slope of the budget constraint will increase.
C) budget constraint will be unchanged.
D) budget constraint will shift outward in a parallel fashion.
E) None of the above.
Budget Line:
The budget line shows the combinations of the two goods which the consumer can buy with the given amount of money income that the consumer has. The budget line acts as a constraint for the consumer while making purchasing decisions. All the points lying within or along the budget line are affordable for the consumers.
Answer and Explanation: 1
C. The Budget constraint will be unchanged
Reason: Decrease in the price of good X and Y will lead to an outward shift in the budget line, whereas decrease in income of the consumer will bring an inward shift in the budget line. Thus the effect of decrease in prices of good X and Y will cancel out the effect of decrease in income of the consumer. Thus the budget constaint will remain unchanged.
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Budget Lines & the Rate of Transformation in Economics
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Chapter 3 / Lesson 11
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In economics, the rate of transformation model can be used to visualize the concept of budget constraints. Learn more about budget constraints, budgets lines, the rate of transformation curve, and how to maximize the utility of the concepts.
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