How would the decrease in the price of Good-X impact the budget line, when the price of Good-Y and Income remain unchanged?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → The intercept point of Good-X will shift outward and the intercept point of Good-Y will remain unchanged.
The budget line shows all combinations of Good-X and Good-Y that a consumer can buy given their income (M) and the prices of the goods (Pₓ for Good-X and Pᵧ for Good-Y).
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If the price of Good-X decreases, then the consumer can buy more units of Good-X with the same income.
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Since the price of Good-Y and income remain unchanged, the maximum quantity of Good-Y that can be purchased stays the same.
Result:
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The X-intercept (quantity of Good-X when all income is spent on it) shifts outward.
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The Y-intercept (quantity of Good-Y when all income is spent on it) remains unchanged.
