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 she spends her entire income on that good?

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

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

Questions 5, 6 and 7 are related to question 4.

Answer 1

(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 =