A consumer wants to consume two goods. The prices of the two goods are Rs 4 and Rs 5 respectively. The consumer’s income is Rs 20. (i) Write down the equation of the budget line. (ii) How much of good 1 can the consumer consume if she spends her entire income on that good? (iii) How much of good 2 can she consume if she spends her entire income on that good? (iv) What is the slope of the budget line?

Question

Philoid · Accepted Answer

Let the units purchased two goods be

Goods 1 X and

Goods 2 Y

(i) Equation of the budget line – P₁X + P₂Y = M

Where

P₁ – Price of Good 1 = 4

P₂ – Price of Good 2 = 5

M – Income of consumer = 20

X – Units of Good 1

Y - Units of Good 2

Therefore, here the budget line will be expressed as

4X + 5Y = 20

(ii) How much of good 1 can the consumer consume if she spends her entire income on that good?

4X + 5(0) = 20

X = 5

(iii) How much of good 2 can she consume if she spends her entire income on that good?

4(0) + 5(Y) = 20

Y = 4

(iv) What is the slope of the budget line?

The slope of budget line is

- 4/5 = X/Y

X/Y = - 0.8