The price of bananas falls while the price of mangoes and the consumer’s income stay the same. Which chain of events is correct?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Budget line pivots outward → new optimum on a higher indifference curve → more bananas bought
A fall in the price of bananas makes the budget line pivot outward. She reaches a higher indifference curve and buys more bananas.
A parallel shift of the line comes from a change in income, with prices unchanged. The line pivots inward when the price of bananas rises, and then she buys fewer.
NCERT (2026-27): “2.2.2 Changes in the Budget Set … If the price of bananas decreases, i.e., p'1< p1, the absolute value of the slope of the budget line decreases and hence, the budget line becomes flatter (it pivots outwards around the vertical intercept and horizontal intercept increases). …” “2.4.2 Deriving a Demand Curve from Indifference Curves and Budget Constraints … The budget set in panel (a), expands and new consumption equilibrium is on a higher indifference curve at point D, where she buys more of bananas … Thus, demand for bananas increases as its price drops. …” |