Question

A budget line for Goods X and Y expands or moves outward when Income increases; if the price of X falls relative to Y, what happens?

Answer 1

The budget line can be defined as a graphical representation of all possible combinations of two goods which can be bought with given income and prices and the cost of each of these combinations will be equal to the money income of the consumer.

Hence when a budget line for Goods X and Y expands or moves outward when Income Increases.

But when the price of X falls relative to Y, then the goods X becomes cheaper to purchase, so the consumer purchasing power increases for the good X and Y both because his real income has increased. But if he spends all his income on the good Y, then he can purchase the same amount of good Y which he was purchasing earlier. But if he purchases the combination of both goods he can purchase more of both goods. If the consumers purchase only good X, then he can purchase more of good X.

All this has been shown in the below diagram.