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 the budget line. (ii) How much of good 1 can the consumer 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»

(i) P1 = Rs 4
= Rs 5
M = Rs 20

Equation of the budget line = P1 x x1 + P2 x x2 = M

4x1 + 5x2 = 20
(ii) If Rs 20 is entirely spent on good 1, then the amount of good 2 demanded will be zero i.e., x2 = 0, as the consumer has no income left to spend on good 2.

4x1 + 5(0) = 20

4x1 = 20

x1 = 20/4

x1 = 5

Amount of good 1 consumed = 5 units
(iii) If Rs 20 is entirely spent on good 2, then x1 = 0, as the consumer has no income left to spend on good 1.

4(0) + 5x2 = 20

5x2 = 20

x2 = 20/5

x2 = 4

Amount of good 2 consumed = 4 units
(iv) Slope of the budget line = - P1/P2

=  - (Price of good 1)/(price of good 2) = - 4/5

= - 0.8


Discussion

No Comment Found

Related InterviewSolutions