1.

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 budget line. (ii) How much of good 1 can the consume, if she spends her entire income on that good ? (iii) How much of good 2 can she consume, if she spends her entire income on that good ? (iv) What is the slope of the budget line ?

Answer» <html><body><p></p>Solution :Let the two goods be x and y <br/> given : Price of `x (P_(x)) = Rs 4`, Price of `y (P_(y)) = Rs 5`, Income of the <a href="https://interviewquestions.tuteehub.com/tag/consumer-25599" style="font-weight:bold;" target="_blank" title="Click to know more about CONSUMER">CONSUMER</a> = Rs 20. Now, the equation of budget line will be: `4 x + 5y = 20` <br/> (<a href="https://interviewquestions.tuteehub.com/tag/ii-1036832" style="font-weight:bold;" target="_blank" title="Click to know more about II">II</a>) If the entire income is spent on good 1 (say, good x), then the quantity consumed of goody y will be zero. <br/> The <a href="https://interviewquestions.tuteehub.com/tag/revised-1188354" style="font-weight:bold;" target="_blank" title="Click to know more about REVISED">REVISED</a> budget line will be: `4x + 5 (<a href="https://interviewquestions.tuteehub.com/tag/0-251616" style="font-weight:bold;" target="_blank" title="Click to know more about 0">0</a>) = 20 " or " 5` units. <br/> So, the consumer will buy 5 units of good 1 (good x) <br/> (iii) If the entire income is spent on good 2 (say, good y), then the quantity consumed of good x will be zero. <br/> The revised budget line will be: `4(0) + 5y = 20 " or " y = 4` units <br/> So, the consumer will buy 4 units of good 2 (good y) <br/> (iv) The slope of a budget line measure the amount of change in good 2 required per unit of change in good 1 along the budget line. It is measured as follows: <br/> Slope `= (-P_(1))/(P_(2)) = (-P_(X))/(P_(Y)) = -0.8`</body></html>


Discussion

No Comment Found

Related InterviewSolutions