Question

Given the change in the budget constraint, which of the following statements are true? (Select all true statements.)

Units of good Y UBC BC2 1 2 3 4 5 6 7 8 9 10 Units of good X

		Good X is an inferior good.
		The demand curve for good X shifted inward.
		The demand curve for good X shifted outward.
		Good X and good Y are complements.

Answer 1

From the give figure , we can see that the original budget constraint is BC1 and new budget constraint is BC2.

Budget constraint changes to BC2 only when price of good Y increases. As Py increases, Qy decreases and BC1 tilt inward to BC2.

Earlier, the optimal bundle is 2 units of X and 8 units of Y . And after change, the optimal bundle is 4 units of X and 3 units of Y.

This implies that after the change in budget constraint ,the demand for good X increases which means demand curve for good X shifted outward. And because Py increases, demand for good X increases, this implies that Good X and Good Y are substitutes. Hence, option(C) is correct.