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Questions
What is a budget line?
What is meant by budget line?
Explain the following:
What is Budget line?
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Solution 1
A budget line represents the different combinations of two goods that are affordable and are available to a consumer; while being aware of his/her income-level and market prices of both the goods.
Let x1 be the amount of good 1.
x2 be the amount of good 2.
P1 be the price of good 1.
P2 be the price of good 2.
P1x1 = Total money spent on good 1
P1x2 = Total money spent on good 2
Then, the budget line will be:
P1x1 + P2x2 = M
All the consumption bundles on the budget line cost the consumer exactly the equivalent of his/her income.
Solution 2
- A budget line, also known as a price line, is a graphical representation of all possible combinations of two goods that a consumer can buy within a fixed budget, given the prices of those goods.
- The line slopes downward, indicating that to buy more of one good, the consumer must give up some quantity of the other. The steepness of the budget line reflects the ratio of the prices of the two goods.
Notes
Students should refer to the answer according to the question.
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