Question

i have calculated the slope of a budget like and its = -2. the question then says explain it briefly. how do i explain this? what does the slow/gradient of budget line represent?

Answer 1

A budget line is the shows how much of the two goods can be bought at their given prices and the given income of the consumer. The slope of the budget line is the ratio of the prices of the two goods. And as we have limited resources in the form of the income, if we want to buy more of one good, we will have to give up some units of the other good, therefore the budget line has a negative slope. To sum up the slope of the budget line is the negative ratio of the price of the two goods.

Let's understand this with an example. Suppose consumer A has $10000. He wants to spend it on 2 goods, Bread and Coffee. The price of 1 unit of bread is $100 and that of coffee is $200

The slop will be -200/100 = -2 or we can find it using the graph too. Let's pick any two points, let's say (0,100) & (5,90)

Y2 — У 1 Slope Х2 — X1

90-100 Slope 5-0

Slope = 2

So following can be the combinations between the two goods which can be purchased from the given income:

Budget	Bread	Coffee
10000	100	0
10000	90	5
10000	80	10
10000	70	15
10000	60	20
10000	50	25
10000	40	30
10000	30	35
10000	20	40
10000	10	45
10000	0	50

Following will be the budget line:

120 0,100 100 5,90 80 10,80 15,70 60 20,60 25, 50 40 30,40 35,30 20 40,20 45,10 0 50,0 0 10 20 30 50 60 Coffee Budget Line 40 Bread