Question

Let’s say that Jane goes to college and has a part-time job. Jane prefers to purchase only normal goods and can afford to because her parents help her out by sending a check every month. Draw a graph to show what happens to Jane’s budget constraint line if her parents forget to send the check one month.

Answer 1

If parents forget to send the check, Jane's income for that month will fall, therefore shifting the budget line leftward parallel to initial budget line, assuming prices are unchanged. Since both goods are normal, Jane will consume less of both goods at lower income.

In following graph, good X and good Y are measured horizontally and vertically respectively. AB & CD are initial and new budget lines. Initial equilibrium is at point S where initial indifference curve IC0 is tangent to AB with quantity of X and Y being X0 & Y0. New equilibrium is at point T where new (lower) indifference curve IC1 is tangent to CD with quantity of X and Y being X1 & Y1. Since both X and Y are normal goods, X1 < X0 and Y1 < Y0.