Question

The vertical (Y-axis) intercept of a consumer's budget constraint reflects:

I. the maximum amount of the Y good the consumer is able to consume, given she spends all her income on good Y

II. the ratio of the consumer's income to the price of the Y good

III. the ratio of the price of the X good to the price of good Y

IV. the ratio of the consumer's income to the price

of the X good

Select one:

a. I only

b. I and II only

c. I and III only

d. I and IV only

e. II only

Answer 1

Let us assume that there are two goods x and y. Also, their respective prices are P_x and P_y. Let the income be m.

The vertical intercept necessarily shows the maximum amount of the Y good the consumer is able to consume, given she spends all her income on good Y.

The budget constraint is

x.P_x + y.P_y = m

To obtain the vertical intercept, we substitute x=0.

We get, y = m/P_y

This means, the vertical intercept is the ratio of the conusmer's income and the price of good y.

Therefore, the answer is option b. I and II only