What are Changes in the Budget Set?
The set of obtainable bundles relies upon the cost of the 2 commodities and the earning of the customer. When the cost of either of the commodities or the customer’s earnings changes, the set of obtainable bundles is also probable to change.
Suppose the customer’s earnings changes from N to N′ but the prices of the 2 commodities remain constant. With the new earning, the customer can manage to purchase all bundles (x1, x2 ) such as p1 x1 + p2 x2 ≤ N′. Now, the equation of the budget line is :
p1 x1 + p2 x2 = N′
Equation can also be written as x2 = N1/p2 – p1/p2 x1
Note that the slope of the new budget line is the same as the slope of the budget line prior to the change in the customer’s earnings.
Hence, this is the detailed information about Changes in the Budget Set. To explore and learn more about Commerce concepts, subscribe to BYJU’S.
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