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Given reason for the following statements: (i) If the income of a consumer changes and prices of the two goods remain unchanged, a new budget line will be formed which will be parallel to the original line . (ii) If the income of the consumer remains unchanged and if the price of goods X rises, intercept of the budget line of Y -axiswill remain the same , but on the X - axis it will shift to the left . |
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Answer» Solution :(i) As we know , slope of budget line is `p_x/P_y` (i.e. price ratio of two goods) with the increases in income `P_x/P_y`remains constant and only ability to purchase quantities of both Commodity X and Commodity Y increases, Hence , the budget line shift parallel to the RIGHT because when slope is same, then CURVE should be parallel . (ii) In this case, the price ratio between X and Y change . Since the price of X rises, the consumer is in a position to purchase LESSER quantity of X while his ability to purchase Y remains unchanged. |
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