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 consumes if she spends her entire

income on that good?

(iii) How much of good 2 can she consume if she spends her entire income on

that good?

(iv) What is the slope of the budget line?

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Answer 1

Explanation:

let x1 denote good 1. and x2 denote good 2.

p1=₹4, p2=₹5, y=₹20

1. p1x1 + p2x2 = y

4x1 +5x2 = 20

2. p1x1 + p2x2 = y

x2 = 0

p1x1 = y

4x1 = 20

x1 = 5

3. x1 = 0

p2x2 = y

5x2 = 20

x2 = 4

4. slope of budget line = p1/p2 = 4/5

Answer 2

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