The budget constraint cuts the horizontal axis at 12 units of good X and it cuts the vertical...

Question:

The budget constraint cuts the horizontal axis at {eq}12 {/eq} units of good {eq}X {/eq} and it cuts the vertical axis at {eq}20 {/eq} units of good {eq}Y {/eq}. If the price of good {eq}X {/eq} is {eq}\$20 {/eq} and the price of good {eq}Y {/eq} is {eq}\$12 {/eq}, then what does income equal?

a. {eq}\$200 {/eq}.

b. {eq}\$240 {/eq}.

c. {eq}\$520 {/eq}.

d. {eq}\$280 {/eq}.

e. Not enough information to answer this question.

Budget Constraint:

A budget constraint can be defined as the linear downward sloping line that shows different combinations of two products/services that a consumer can consume by spending their entire money income.

Answer and Explanation: 1

  • The correct option is b. $240.

Mathematically, the budget line equation can be written as:

Income = Price of Good X * Quantity of Good X + Price of Good Y * Quantity of Good Y

Income = $20 * 12 + $12 * 20

Income = $120 + $120

Income = $240


Learn more about this topic:

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Budget Constraints: Definition & Formula

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Chapter 1 / Lesson 6
60K

Learn what budget constraint is and view examples. Understand how to use the budget constraint formula and how to represent a budget constraint using a graph.


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