A consumer wants to consume two goods.The prices of the two goods are

1.	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 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 she spends her entire income on that good?(iv) What is the slope of the budget line?
Answer» (i) Let the two goods be X and Y. We are given Px =Rs. 4, Py= Rs.5, Consumer's income (M) =Rs. 20. Budget line equation is : PxX +PyY = M or=>4x+5y=29 (ii) If quantity consumed of Good Y = 0, Budget equation becomes : P_xx+ P_yy= M 5x+0=20 x=20/5 =4 units (iii) If quantity consumed of Good X =0, Budget equation becomes : zero + P_yY = M or=>5Y=20=Y=20/5=4 units (iv) slope of budget line Px/Py=4/5=0.8

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 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 she spends her entire income on that good?(iv) What is the slope of the budget line?

Answer»

(i) Let the two goods be X and Y. We are given Px =Rs. 4, Py= Rs.5, Consumer's income (M) =Rs. 20.

Budget line equation is : PxX +PyY = M

or=>4x+5y=29

(ii) If quantity consumed of Good Y = 0,

Budget equation becomes :

P_xx+ P_yy= M

5x+0=20

x=20/5 =4 units

(iii) If quantity consumed of Good X =0,

Budget equation becomes : zero + P_yY = M

or=>5Y=20=Y=20/5=4 units

(iv) slope of budget line Px/Py=4/5=0.8