Question

How does the budget line change if the consumer’s income increases to Rs 40 but the prices remain unchanged?

Answer 1

ANSWER:

The old and new budget line would be parallel to each other as there the slope of the budget line will not change since prices for both goods remain unchanged  

EXPLANATION: After the income rise to 40 Rs

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

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

M= 40 Rs

$\mathrm{x}_{1}=40 / \mathrm{P}_{1}=40 / 4=10 \text { units }$

$\mathrm{x}_{2}=40 / \mathrm{P}_{2}=40 / 5=8 \text { units }$

If the consumer's income increases to 40 Rs, then the consumer could purchase more of both goods. There will be rightwards shiftin the budget line from AB to the new budget line A1B1.

However the new budget line and the old budget line would be parallel to each other, since there would be no change in the slope of the budget line (as prices for both goods remain unchanged)

Answer 2

Answer:

The old and new budget line would be parallel to each other as there the slope of the budget line will not change since prices for both goods remain unchanged  

EXPLANATION: After the income rise to 40 Rs

M= 40 Rs

If the consumer's income increases to 40 Rs, then the consumer could purchase more of both goods. There will be rightwards shiftin the budget line from AB to the new budget line A1B1.

However the new budget line and the old budget line would be parallel to each other, since there would be no change in the slope of the budget line (as prices for both goods remain unchanged)

Explanation: