Question

Explain the meaning of 'Budget set' and 'Budget line'.

Answer 1

A budget set represents those combinations of consumption bundles that are available to the consumer given his/her income level and at the existing market prices. In other words, it represents those consumption bundles that the consumer can purchase using his/her money income (M).
A budget line represents the different combinations of two goods that are affordable and are available to a consumer given his/her level of income and the market prices of the goods. The equation of the budget line is represented as follows.
$P_1{x}_1+P_2{x}_2=M$
With the help of the budget line we can estimate the amount of income that is spent on different goods.