Question

1. For a budget spent entirely on two goods, an increase in the price of one will necessarily decrease the consumption of both if both goods are normal. True or False: With the use of an appropriate diagram, explain your answer.

need an appropriate diagram for the answer. thanks

Answer 1

Answer : The answer is True.

Let in the above picture's diagram good-X and good-Y both are normal good. In case of normal good if price rise then the budget decrease. In the above picture's diagram the initial budget line is B1 and the initial indifference curve is IC1 and initial optimum consumption occurs at point E1. Now due increase in price level the budget level has decreased which shifts the budget line to leftward. The new budget line is B2 and new indifference curve is IC2. The new optimum consumption level occurs at point E2. As a result, the consumption level of both good-X and good-Y has decreased. Therefore, the given statement is true.

IC Be B1 nood X