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Briefly explain the budget set with the help of a diagram.

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The budget set is the collection of products that the consumer can buy with is income at the prevailing market prices. The budget set is also known as opportunity set. It includes all the bundles (all possible combination of two goods) which the consumer can purchase with his given level of income. 

The budget equation can be written as follows:

P1X1 + P2 X2 ≤ M.

Consider, for example, a consumer who has Rs.20 and suppose both the goods are priced at Rs.5 and are available only in integral units. The bundles that this consumer can afford to buy are (0,0), (0,1), (0,2), (0,3), (0,4), (1,0), (1,1), (1,2), (1,3), (2,0), (2,1), (2,2), (3,0), (3,1) and (4,0). Among these bundles, (0,4), (1,3), (2,0), (2,2), (3,1) and (4,0) cost exactly Rs.20 and all the other bundles cost less than Rs.20. If both the goods are perfectly divisible, the consumer’s budget set would consist of all bundles (x1, x2) such that x1 and x2 are any numbers greater than or equal to 0 and P1X1 + P2 X2≤ M. 

The budget set can be represented in a diagram as follows:

Quantity of bananas is measured along the horizontal axis and quantity of mangoes is measured along the vertical axis. Any point in the diagram represents a bundle of the two goods. The budget set consists of all points on or below the straight line having the equation P1X1 + P2 X2≤ M.

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