Question

Suppose a consumer whose budget is ₹ 500, wants to consume only two goods, Good X and Good Y. The goods are respectively priced at ₹ 50 and ₹ 25.

Answer the following questions on the basis of the given information:
(a) State the budget equation of the consumer.
(b) What is the slope of the budget line?
(c) How many units can she purchase if she spends the entire ₹ 500 on Good X?
(d) How many units can she purchase if she spends the entire ₹ 500 on Good Y, given that the price of good Y has doubled?

Answer 1

Given: 
Budget or Income (M)= ₹500 
Price of Good X (P_x) =  ₹50
Price of Good Y (P_y) =  ₹ 25

(a) The budget equation of the consumer:
P_x.X + P_y.Y = M

Putting all the values in the given equation:
50X +25Y = 500 (Budget Equation)

(b) The slope of the budget line is  `-"P"_"x"/"P"_"y" = - (50)/(25) = -2`

(c) Units of Good X when entire income is spent on Good X implies that Y = 0. Putting the values in the budget equation we get, 
50X + 25(0) = 500
50X = 500
X = 10 units

(d) Units of Good Y when entire income is spent on Good Y implies that X = 0 and also P_y has doubled implies that P_y =  ₹50.

Putting all the values in the budget equation we get,
50(0) + 50(Y) = 500
50Y = 500
Y = 10 units