a consumer wants to consume 2 goods apple and bananas each cost 5 ₹ and 6 ₹ respectively if his income is 20 rs draw a budget line
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Answer:
Let X
1
denote Good-1 and X
2
denote Good-2.
P
1
=Rs4,P
2
=Rs5,Y=Rs20
(i) P
1
X
1
+P
2
X
2
=Y
4X
1
+5X
2
=20
Thus, the equation of the budget line is 4X
1
+5X
2
=20.
(ii) We know equation of the budget line is:
P
1
X
1
+P
2
X
2
=Y
If the consumer spends her entire income on Good-1, then
X
2
=0
P
1
X
1
=Y⇒4X
1
=20
X
1
=5
Thus, the consumer can buy 5 units of Good-1 if she spends her entire income on that good.
(iii) If the consumer spends her entire income on Good-2, then
X
1
=0
P
2
X
2
=Y⇒5X
2
=20
X
2
=4
Thus, the consumer can buy 4 units of Good-2 if she spends her entire income on that good.
(iv) Slope of budget line =
P
2
P
1
=
5
4
.
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