Question

What will be the impact on budget line of a consumer, keeping other things constant, if price of good X falls? ​

Answer 1

Explanation:

With fall in price of good Y, other things remaining unchanged, the consumer could buy more of Y with the given money income and therefore budget line will shift above to LB'. Similarly, with the rise in price of Y, other things being constant, the budget line will shift below to LB “.

Answer 2

The budget line will shift upwards if the price of a good falls, other things remaining constant.

• The budget of the consumer will remain the same.
• Now, when the price of the first commodity falls, it means it will take up less portion of the budget.
• Therefore, the consumer can purchase more quantities of the second commodity, its price remaining the same.
• The combination of both goods that can be purchased within the given budget has now changed.
• The budget line will shift upwards because more units of the commodities are being purchased.
• Alternatively, if the price of the first commodity was increased, the budget line would shift downwards.