Question

Suppose that a consumer’s income rises by 20% at the same time the price of apples rises by 20%. a. Show what happens to the budget line between other goods and apples. b. Will the consumer’s consumption of other goods rise or fall? Explain with the aid of your graph.

Answer 1

Assume Income = $X

Price of Apple = $a

Price of other goods = $b

Maximum Consumption of apple = X / a

Maximum Consumption of other goods = X / b

If price of apple rises by 20% making price of apple equal to $1.2a and income becomes $1.2X while price of other goods remain same at $b.

Now maximum consumption of apple = 1.2X / 1.2a = X / a

Now maximum consumption of other goods = 1.2X / b = 1.2X / b

Thus, we can say that consumption of other goods rises from (X / b) to (1.2X / b)