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 ?

A consumer wants to consume two goods. The prices of the two goods are

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» Solution :Let the two goods be x and y given : Price of `x (P_(x)) = Rs 4`, Price of `y (P_(y)) = Rs 5`, Income of the CONSUMER = Rs 20. Now, the equation of budget line will be: `4 x + 5y = 20` (II) If the entire income is spent on good 1 (say, good x), then the quantity consumed of goody y will be zero. The REVISED budget line will be: `4x + 5 (0) = 20 " or " 5` units. So, the consumer will buy 5 units of good 1 (good x) (iii) If the entire income is spent on good 2 (say, good y), then the quantity consumed of good x will be zero. The revised budget line will be: `4(0) + 5y = 20 " or " y = 4` units So, the consumer will buy 4 units of good 2 (good y) (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: Slope `= (-P_(1))/(P_(2)) = (-P_(X))/(P_(Y)) = -0.8`