Both the prices of the two goods and the consumer’s income double. Wh…

Both the prices of the two goods and the consumer’s income double. What is the effect on her budget set?

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → The budget line and the budget set stay the same

If every price and the income double, each bundle costs twice as much, and she has twice the money. So the very same bundles are affordable, and the budget line does not move.

New line: 2p₁x₁ + 2p₂x₂ = 2M, which is the same as p₁x₁ + p₂x₂ = M

Horizontal intercept: 2M/2p₁ = M/p₁

Vertical intercept: 2M/2p₂ = M/p₂

Slope: −2p₁/2p₂ = −p₁/p₂

Option (1) The budget line becomes steeper, as both prices rise — a steeper line needs the price of one good to rise relative to the other.

Option (3) The budget line shifts outward, parallel to the old line — a parallel shift needs income to change while prices stay the same.

Option (4) The budget line shifts inward, parallel to the old line — this too needs a change in income alone, a fall, with prices the same.

NCERT (2026-27): “2.2.1 Budget Set and Budget Line … The equation of the line is p₁x₁ + p₂x₂ = M (2.2) The line consists of all bundles which cost exactly equal to M. This line is called the budget line. … The budget line is a straight line with horizontal intercept M/p₁ and vertical intercept M/p₂. The horizontal intercept represents the bundle that the consumer can buy if she spends her entire income on bananas. Similarly, the vertical intercept represents the bundle that the consumer can buy if she spends her entire income on mangoes. The slope of the budget line is –p₁/p₂.”