. How does the budget line change if the consumer’s income increases to ?40 but the prices remain unchanged? [1 Mark]
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Explanation:
M2 = Rs. 40 P1 = Rs. 4 P2 = Rs. 5 Initial equation of the budget line: 4x1 + 5x2 = 20 New equation of the budget line: 4x1 + 5x2 = 40 As M has increased, the consumer can now purchase more of both the goods and the budget line will shift parallelly outwards to A’B’ from AB. Horizontal intercept will be= M/P1 = 40/4 =10 Vertical intercept will be= M/P2 = 40/5 = 8 The slope of the new budget line will be the same as that of the old budget line. -P1/P2 = 4/5
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