Question

Explain the meaning of  Budget line.

Define budget line

Answer 1

A budget line shows various combinations of two goods which a consumer can purchase with the given income and the prices of the two goods when the consumer spends the entire income.

The equation of the budget line:

`P_1X_1 + P_2X_2 = M`

Where,

P₁ - per unit price of Good 1
P₂ - per unit price of Good 2
X₁ - quantity of Good 1
X₂ - quantity of Good 2
M - income of the consumer

Answer 2

Budget line represents the different combinations of two goods that are affordable and are available to a consumer given his/her level of income and the market prices of the goods.