Question

Suppose a consumer whose budget is Rs500, wants to consume only two goods Good
X and Good Y. The goods are respectively priced at Rs50 and Rs25
Answer the following questions on the basis of the given information:
(a) State the budget equation of the consumer.
(b) What is the slope of the budget line?
(c) How many units can she purchase if she spends the entire Rs500
on Good X ?
(d) How many units can she purchase if she spends the entire Rs500
on Good Y. given that the price of good Y has doubled ?
OR​

Answer 1

Answer:

Budget or Income (M)= ₹500

Price of Good X (Px) = ₹50

Price of Good Y (Py) = ₹ 25

(a) The budget equation of the consumer:

Px.X + Py.Y = M

Putting all the values in the given equation:

50X +25Y = 500 (Budget Equation)

(b) The slope of the budget line is

-PxPy=-5025=-2

(c) Units of Good X when entire income is spent on Good X implies that Y = 0. Putting the values in the budget equation we get,

50X + 25(0) = 500

50X = 500

X = 10 units

(d) Units of Good Y when entire income is spent on Good Y implies that X = 0 and also Py has doubled implies that Py = ₹50.

Putting all the values in the budget equation we get,

50(0) + 50(Y) = 500

50Y = 500

Y = 10 units