Question

How does the budget line change if the consumer’s income increases to Rs 40 but the prices remain unchanged?

Answer 1

M₂ = Rs 40

P₁ = Rs 4

P₂ = Rs 5

Initial equation of the budget line:

4x₁ + 5x₂ = 20

New equation of the budget line:

4x₁ + 5x₂ = 40

As M has increased, the consumer can now purchase more of both the goods and the budget line will shift parallelly outwards to A’B’ from AB.

Horizontal intercept will be

Vertical intercept will be

The slope of the new budget line will be the same as that of the old budget line.