With reference to the budget line \( p_1x_1 + p_2x_2 = M \), which of the following statements is NOT correct?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Points below it show bundles that cost more than M.
The budget line holds bundles that cost the whole income M. Bundles below it cost less than M; bundles above it cost more.
Option (1) Its horizontal intercept is \( \displaystyle\frac{M}{p_1} \). — True. Spending all of M on good 1 buys M/p1 units.
Option (2) Points below it show bundles that cost more than M. — False. Points below the line cost strictly less than M.
Option (3) Its vertical intercept is \( \displaystyle\frac{M}{p_2} \). — True. Spending all of M on good 2 buys M/p2 units.
Option (4) Its slope is \( -\displaystyle\frac{p_1}{p_2} \). — True. The slope is minus the price ratio.
NCERT (2026-27): “2.2.1 Budget Set and Budget Line … The line consists of all bundles which cost exactly equal to M. This line is called the budget line. Points below the budget line represent bundles which cost strictly less than M. …” “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.” |