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Question 2 (1 point) In the diagram, what change must have occurred to rotate the budget line as shown? Roses Orchids a) The price of orchids rose. b) The price of orchids fell. c) The price of roses fell. d) The price of roses rose
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Answer: Assuming orchids to be a normal good the answer must be b). The explanation is as follows. Since the budget line has rotated towards the left, it has become flatter than before. This can happen only when the slope of the budget line falls. The equation of the budget line is given by  m=-po/pr.o+m/pr where m = money income, pr=price of roses and po=price of orchids. Since the real income remains unchanged (i.e. intercept remains unchanged), price of roses cannot rise. Hence it must be the case that the price of orchids have fallen.

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