Question

The consumer has an income of Rs. 100. He wants to consume two goods X and Y. Prices of X and Y are Rs. 20 and 10 respectively. 

1. State the equation of the budget line. 

2. How much of good X he can buy if he spends entire income on good X. 

3. How much of good Y he can buy if he spends entire income on good Y.

Answer 1

1. The equation of the budget line is given as P₁ + P₁X =M 

Where P₁ and P₂ are prices of good 1 and good 2 respectively. X₁ and X₂ are quantities of two goods. ‘M’ denotes the income of the consumer.

2. 5 units of good X. 

3. 10 units of good Y