Question

What is a budget line?

Answer 1

A budget line represents the different combinations of two goods that are affordable and are available to a consumer; while being aware of his/her income-level and market prices of both the goods.

Let x₁ be the amount of good 1.

x₂ be the amount of good 2.

P₁ be the price of good 1.

P₂ be the price of good 2.

P₁x₁ = Total money spent on good 1

P₁x₂ = Total money spent on good 2

Then, the budget line will be:

P₁x₁ + P₂x₂ = M

All the consumption bundles on the budget line cost the consumer exactly the equivalent of hi/her income.