Question

Write the properties of budget line

Answer 1

i) Since budget line is derived from a linear budget equation M = XPx + YPy, so it is a straight line. The intercepts of this line with the axes show the maximum amount of one commodity that can be purchased, if none of the other is bought.


(ii) Budget line has a negative slope, i.e., slopes downward from left to right. The negative slope of the budget line is mathematically established by noticing coefficient of ‘X’, i.e., – PX/PY when the budget equation is rearranged as

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(iii) Mathematically, the slope of the budget line is derivative ∂Y/∂X or coefficient of ‘X’ in the above equation. Thus, the slope of the budget line is negative of the price ratio, i.e., – Px/ Py. If prices of commodity ‘X’ and commodity ‘Y’ are equal, then, the budget line would have a 45° angle with both the axis.