Question

Consider an economy that consists of just two goods, butter (b) and chocolate (C). The price of butter is $2 per pound and the price of chocolate is $4 per pound. A consumer in this economy has an income of m = 30. Suppose you graph the budget line with con the vertical axis and b on the horizontal axis. What is the slope of the budget line? Round your answer to two decimal places.

Answer 1

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Two goods, butter(b) and chocolate(c) =>

Equation of budget line =>

m = P(b)*b + P(c)*c

Divide by P(c) on both the sides

m/Pc = Pb / Pc * b + c

c = m/Pc - Pb / Pc * b

Here, m / Pc is the intercept of the budget line

and -[ Pb / Pc ] is the slope of the budget line

putting the values =>

c = 30 /4 - 2/4 * b

the slope of the budget line = -2/4

= - 1/2

= - 0.5 { Here negative sign is shows that the budget line is downward sloping. }