Question

A consumer wants to consume two goods. The prices of the two goods are Rs 4 and Rs 5 respectively. The consumer’s income is Rs 20. (i) Write down the equation of the budget line. (ii) How much of good 1 can the consumer consume if he/she spends his/her entire income on that good? (iii) How much of good 2 can be consumed if he/she spends his/her entire income on that good? (iv) What is the slope of the budget line?

Answer 1

ANSWER:

4 x_{1}+5 x_{2}=20

5 units

4 units

-0.8

EXPLANATION:

$\mathrm{P}_{1}=4 \mathrm{Rs}$

$\mathrm{P}_{2}=5 \mathrm{Rs}$

M = 20

The budget line’s equations is: $P_{1} x_{1}+P_{2} x_{2}=M$

$4 x_{1}+5 x_{2}=20$

If 20 Rs is totally expended on good 1, then the quantity of good 2 needed will be 0, that is , x2 = 0, since the consumer has nil income left for spending on good 2.

$4 x_{1}+5(0)=20$

$4 x_{1}=20$

$x_{1}=\frac{20}{4}$

$x_{1}=5$

Quantity of good 1 consumed will be 5 units

If 20 Rs is totally expended on good 2, then the quantity of good 1 needed will be 0, that is , x1= 0, since the consumer has nil income left for spending on good 1.

$4(0)+5 x_{2}=20$

$5 x_{2}=20$

$x_{2}=\frac{20}{5}$

$x_{2}=4$

Quantity of good 2 consumed will be 4 units

The budget line’s slope $=-\frac{P 1}{P 2}$

= - (Price of good 1)/ (Price of good 2) ,

$=-\frac{4}{5}=-0.8$