Question

For the following scenario, draw a graph of the budget constraint before and after the change...

  1. For the following scenario, draw a graph of the budget constraint before and after the change and explain what happens to the slope as well as the maximum possible amount of X1 and X2 the consumer can purchase. You may have to consider cases where the effects are uncertain. If you find such cases, split them into various possibilities and present them separately.
  1. P1 decreases 5% and I increase 10%
  2. P2 decreases. I decreases 10%. P1 increases
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Answer #1

In the first scenario the budget line will shift to theright along the X axis from OM to OM'. Which indicates that there is an increase in the amount of X1 commodity with increase in income.

In scenario 2, the income has decreased, and the price of X2 has also decreased, but at the same time the price of X1 has increased. Hence the consumer cannot increase his consumption of X2 because he will have to compensate the decreased income and increased price of X2

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