Question

3. (3 Points) Intuitively describe what the slope of the budget line tells us about the consumer's ability to trade goods X and Y. 4. (6 Points) For each description of a change in the budget line given below, state which of the following increases or decreases for the budget constraint variables would cause it: † Px + PxPy. Pytw, and I W. (a) The budget line rotates inward around its horizontal intercept (meaning that it's horizontal intercept does NOT change). The budget line shifts outward (but does not rotate/change slope at all). The budget line rotates inward around its vertical intercept. The budget line rotates outward around its vertical intercept. The budget line rotates outward around its horizontal intercept. (1) - The budget line shifts inward. 5. Consider the three budget constraint variables: Px. Py, and W. (a) (3 Points) If you spend all of your income on good X, then changes in which of the three budget constraint variables would affect how much of good X you could buy? (b) (3 Points) If you spend all of your income on good Y, then changes in which of the three budget constraint variables would affect how much of good Y you could buy? (c) (3 Points) Changes in which of the three budget constraint variables affect the rate at which you can trade good X for good Y?

Answer 1

e) Bisthe budget line rotahes outward around its horizontal intercept This happens, when price of good x decreases When Px 4 from $ 5 to $2. 5x +sy - loo (old) 2x+54 =100 (New) Max possible consumptions X: too so ; Y = 20. 20 50 8 wy The budget line shifts inward. Shelton Opposite to the case in (b), When w te from $100 to $50, you can now consume less of both goods. 5x+3y=100 (old) 5x + sy= so (New) Max bossible consumptions are X 50 10 : Y=10 у 20 20

- a P ↑ The budget line Since, budget line is rotaning The budget line rotahes enward around its horizontal intercept. ce budget line is rotating inward, this situation arise when the price of good x let X represents on horizontal axis) rises. For exa Px = 5; Py=5 : W=100 5x + sy =100 Maximum possible consumption - 100 = 20 y good x (x = 0) Maxinum bossible consumption = 100 - 20 oy good y (x=0) When Px rise from $500 $10, with no change in Py Now, Max bossible coryumption - 100 = 10 of good x Max possible consumption = 100 - 20 of good y. loox 25 (b) WT The budget line shifts outward , when there is an increase in wage rate.

Let's suppose wa Joom $100 to $125. 5x+ 5y = 125. Now, Max possible Consumptions are x=725 25 Y= 125 225 in slope of budget line = 1 (no change) In this case, budger line shifts parallelly outward. Py T The budget line rotates inward around its vertical intercept As we have dis@ussed in past (a), this happens when borice of a good sises. Py 1. will lead to rotation og budget line inwardly. when ly a from $5 to $10. ro) The budget line rotates outward around its vertical intercept by This case is just opposite to the above one. When py to from $5 to $2. Max possible Grsumption of - 100 = 50 good y 20 x