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Question:

How does the budget line change if the consumer’s income increases to Rs 40 but the prices remain unchanged?

Answer:

M2 = Rs. 40
P1= Rs. 4
P2 = Rs. 5
Initial equation of the budget line:
4x1 + 5x1 = 20
New equation of the budget line:
4x1 + 5x1 = 40
As M has increased, the consumer can now purchase more of both the goods and the budget line will shift parallelly outwards to A’B’ from AB.
Horizontal intercept will be=
Vertical intercept will be=
The slope of the new budget line will be the same as that of the old budget line.


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