A consumer’s income falls while the prices of both goods stay the same. Which chain of events is correct?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → The budget line shifts inward parallel to itself → the new optimum is on a lower indifference curve
A fall in income with prices unchanged moves the budget line inward, parallel to itself. Her old optimum now costs more than her income. The highest curve the new line can touch is a lower indifference curve.
A pivot comes from a change in one price, not from a change in income. The old curve cannot be reached, because every bundle on it lies above the new line.
NCERT (2026-27): “2.2.2 Changes in the Budget Set … If the income increases, the consumer can buy more of the goods at the prevailing market prices. Similarly, if the income goes down, i.e. if M' < M, both intercepts decrease, and hence, there is a parallel inward shift of the budget line. If income goes down, the availability of goods goes down. …” “2.3 Optimal Choice of the Consumer Figure 2.12 illustrates the consumer’s optimum. … The first thing to note is that the indifference curve just touching the budget line is the highest possible indifference curve given the consumer’s budget set. Bundles on the indifference curves above this, like the grey one, are not affordable. …” |