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A consumer wants to consume two goods . The prices of the two goods are Rs 4 and Rs 5 respectively. The consumer's income is Rs 20. (i) Write down the equation of the budget line. (ii) How much quantity of good 1 can the consumer consume if she spends her entire income on that good ? (iii) How much of good 2 can she consume if the spends her entire income on that good ? (iv) What is the slope of the budget line ? |
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Answer» Solution :(i) Let the two quantities of GOODS be X and Y. We are given `P_x` = RS 4, `P_y` = Rs5, Consumer.s income (M) = Rs 20 . Budget line equation is , `P_(x^(.))X+P_(y^(.))Y=M" or "=4X+5Y=20` (II) If quantity consumed of good y = 0 , Budget equation becomes, `P_(x^(.))X+ZERO = M = 4.X = 20 = X = 20//4=5` UNITS . (iii) If quantity consumed of good X = 0 , Budget equation becomes, Zero , `+p_.Y=M` or = 5Y= 20 = Y = 20/5 = 4 units . (iv) Slope of budget line `=P_x//P_y = 4//5 = 0.8` |
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