A consumer's budget is Rs. 80. He is buying Good-1 and Good-2. Price of Good-1 is Rs.16 per unit and of Good-2 is Ps.20 per unit. Draw a budget line on the basis of the figures and explain it.
Answers
Answered by
0
Answer:
answer
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.
Similar questions