Question

Suppose consumer's income is Rs 20, price of good 1 is Rs 4 per unit and the price of

good 2 is Rs 2 per unit. State the bundles which the consumer can purchase if he

spends his entire income. Show the budget line also​

Answer 1

Answer:

Let X1 denote Good-1 and X2 denote Good-2.

P1=Rs4,P2=Rs5,Y=Rs20

(i) P1X1+P2X2=Y

4X1+5X2=20

Thus, the equation of the budget line is 4X1+5X2=20.

(ii) We know equation of the budget line is:

P1X1+P2X2=Y

If the consumer spends her entire income on Good-1, then

X2=0

P1X1=Y⇒4X1=20

X1=5

Thus, the consumer can buy 5 units of Good-1 if she spends her entire income on that good.

(iii) If the consumer spends her entire income on Good-2, then

X1=0

P2X2=Y⇒5X2=20

X2=4

Thus, the consumer can buy 4 units of Good-2 if she spends her entire income on that good.

(iv) Slope of budget line = P