Question

A consumer budget is Rs 40 .He is buying Good 1 and Good 2. Price oo Good 1 is Rs 8 and Good 2 Rs 10 per unit.

Answer 1

Explanation:

Let X

1

denotes quantity of Good-1 and X

2

denotes quantity of Good-2.

Given,

Consumer's budget, i.e., consumer's income (Y) = Rs 40

Price of Good-1 (P

1

) = Rs 8 per unit

Price of Good-2 (P

2

) = Rs 10 per unit

We know equation of the budget line is:

P

1

X

1

+P

2

X

2

=Y

8X

1

+10X

2

=40

When X

2

=0

8X

1

=40

⇒X

1

=5

Thus, when the entire income of the consumer is spent on Good-1, he can buy 5 units of Good-1.

When X

1

=0

10X

2

=40

⇒X

2

=4

Thus, when the entire income of the consumer is spent on Good-2, he can buy 4 units of Good-2. Accordingly, the budget line touches 4 units on Y-axis and 5 units on X-axis, as in Figure. Since price ratio remains constant, budget line is a straight line.

solution