How does budget line change with price and income?
The budget line will shift when there is: A change in the prices of one or both products with nominal income (budget) remaining the same. A change in the level of nominal income with the relative prices of the two products remaining the same.
What happens to the budget line when price and income increases?
When there is an increase in income, a consumer can buy more of both goods and this shows an outward i.e. rightward shift in the budget line. On the other hand, when there is a decrease in income, the consumer’s consumption possibility decreases, and the budget line shifts inwards.
How do the price and income affect the shape of budget line?
The budget constraint framework suggest that when income or price changes, a range of responses are possible. When income rises, households will demand a higher quantity of normal goods, but a lower quantity of inferior goods.
How does income affect budget line?
Effects of Income Change
The new equilibrium for a greater income is higher on the budget line because the increased income allows the consumer to purchase more of both products. Higher income increases affordability of the goods, while lower income decreases it.
What does the budget line in terms of price and money income indicate?
If a straight line joining 5Xand 10Vis drawn, we will get what is called the price line or the budget line. Thus budget line shows all those combinations of two goods which the consumer can buy by spending his given money income on the two goods at their given prices.
Does the change in income affect the slope of the budget line?
In case of budget line, slope = PX/PY As change in income does not disturb the price ratio of the two commodities, the slope will not change and the budget line, after change in income will remain parallel to the original budget line.
What is the most likely cause of the change in her budget line?
What is the most likely cause of the change in her budget line? Airline flights got more expensive. Which of the following is a characteristic of monopolistic competition?
What do you mean by budget line what are the reasons of change in budget line?
A decrease in income causes the budget line to shift inward, parallel to the original line (holding prices constant) so a consumer can buy less of both goods with less income.
How does the budget line change if the price of good 2 decreases by a rupee?
Since the income and the price of good 1 are unchanged, the decrease in the price of good 2 will increase the vertical intercept of the budget line. The new budget line will also pivot outwards around the same horizontal intercept.
What is price line and budget line?
This price line shows all those combinations of two goods which the consumer can buy by spending his given money income on the two goods at their given prices.
How does price line change?
The budget line will shift when there is: A change in the prices of one or both products with nominal income (budget) remaining the same. A change in the level of nominal income with the relative prices of the two products remaining the same.
What do you understand by budget line?
Budget line is a graphical representation of all possible combinations of two goods which can be purchased with given income and prices, such that the cost of each of these combinations is equal to the money income of the consumer.
Why is budget line important in indifference curve analysis?
The Utility-Maximizing Solution
We assume that each consumer seeks the highest indifference curve possible. The budget line gives the combinations of two goods that the consumer can purchase with a given budget.
How does the budget line on the indifference map moves of the consumer income increases?
3.12, when a consumer’s income increases, his budget line shifts parallel and upward and when his income decreases the budget line shifts downward.
Is budget line and budget constraints same?
(The difference between these two curves is that the PPF shows all the different combinations given time a time/production constraint, whereas a budget line shows different combinations given budget constraint. Otherwise, the two graphs are basically the same).
How indifference curves and budget line can be used to explain consumer equilibrium?
With the constraint of budget line, the highest indifference curve, which a consumer can reach, is IC2. The budget line is tangent to indifference curve IC2 at point ‘E’. This is the point of consumer equilibrium, where the consumer purchases OM quantity of commodity ‘X’ and ON quantity of commodity ‘Y.
What is budget line what is the role in the determination of consumer’s equilibrium?
Straight line: It indicates a continuous market rate of exchange in individual combinations. Real income line: It denotes the income and the spending size of a customer. Tangent to indifference curve: It is the point when the indifference curve meets the budget line. This point is known as the consumer’s equilibrium.
What is the budget line indifference curve and the optimum combination?
The consumer’s optimal combination of goods is at the point where the budget line is tangent to an indifference curve or where the marginal rate of substitution (MRS) is equal to the opportunity cost or relative price of the two goods, as indicated by the slope of the budget constraint.