-1
$\begingroup$

I'm studying for a microeconomics midterm and ran across the following question:

A person consumes two goods, X and Y. The consumer's only source of income is given by the quantity of Y equal to ten, which he can sell on the market at the existing price.

What would the budget constraint look like? What would it look like if the price of Y increases?

I initially drew the curve with a downward slope until it hits Y=10 on the Y-axis then it becomes vertical down to the X-axis. Can it look like this given that the question doesn't specify how much of X is being consumed?

Thank you in advance.

$\endgroup$
1
$\begingroup$

:)

A person is endowed with $(x,y) = (0,10)$ units. Suppose, price of $x$ is $p_x$; price of $y$ is $p_y$ . So, the income of the consumer = $10 p_y$

And the corresponding budget constraint will be: $x p_x + y p_y = 10p_y$

Vertical intercept $(0, y) = (0,10)$ and horizontal intercept $(x, 0) = \left( \displaystyle\frac{10p_y}{p_x}, 0\right)$

Now suppose $p_y$ is increased to $p_y'$.

New budget line will be : $x p_x + y p_y' = 10p_y'$

Vertical intercept $(x = 0, y) = (0,10)$ which is same as the previous case.

And horizontal intercept $(x, 0) = \left( \displaystyle\frac{10p_y'}{p_x}, 0\right) > \left( \displaystyle\frac{10p_y}{p_x}, 0\right) $ because $p_y' > p_y$

Therefore, the new budget line has become flatter with the same vertical intercept.

The graph looks something like this: enter image description here

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.