Question

Discuss the meaning of budget line, with a hypothetical schedule and diagram.

Answer 1

A budget line is a line that shows different possible combinations of two goods that a consumer can purchase by spending his entire income at given prices of the two goods.

The budget line is also known as the Price Line.

Suppose a consumer has an income of ₹ 100. The price of Good X is ₹ 10 per unit and the price of Good Y is ₹ 20 per unit.

Combination	Good X (Units)	Good Y (Units)
A	0	5
B	2	4
C	4	3
D	6	2
E	8	1
F	10	0

 

1. The budget line AF represents all possible combinations of Goods X and Y that the consumer can purchase by spending his entire income of ₹ 100.
2. At point A, the consumer purchases 5 units of Good Y and no units of Good X.
3. At point F, the consumer purchases 10 units of Good X and no units of Good Y.
4. All other points on the budget line represent different combinations of the two goods that cost exactly ₹ 100.
5. The budget line slopes downward from left to right because the consumer must sacrifice some units of one good to purchase more units of the other good.