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Question

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 he/she spends his/her entire income on that good?

(iii) How much of good 2 can be consumed if he/she spends his/her entire income on that good?

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

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Solution

(i) P1 = Rs 4

P2 = Rs 5

M = Rs 20

Equation of the budget line = P1x1 + P2x2 = M

4x1 + 5x2=20

(ii) If Rs 20 is entirely spent on good 1, then the amount of good 2 demanded will be zero i.e., x2 = 0 as the consumer has no income left to spend on good 2.

4x1 + 5 (0) = 20

4x1 = 20

Amount of good 1 consumed = 5 units

(iii) If Rs 20 is entirely spent on good 2, then x1 = 0, as the consumer has no income left to spend on good 1.

4(0) + 5(x2) = 20

5(x2) = 20

Amount of good 2 consumed = 4 units

(iv) Slope of the budget line =


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