Question

What will be the changes in budget line, if there is a change in cost of Rs. 1 in Goods 2, hut Goods 1 and income remains unchanged?

Answer 1

Income of Consumer (M) = Rs. 20
Price of Goods 1 (P₁) = Rs. 4 unit
New Cost of Goods 2 (P₂) = 5 – 1 = Rs. 4 unit
If after the declining of Goods-2 cost, consumer bought goods from his total income then he would be able to purchase 20/4 = 5 units
Therefore, consumer can buy comparatively more goods than before.

Diagram will be made like this –

Above graph makes it clear that budget line shifted towards Y-axis but it is constant on that point on X-axis.