Say a consumer is consuming 2 commodities, banana and mangoes with his given amount of income. We make a budget line for that, taking bananas on x axis and, mangoes on y axis. Now assume that the prices of bananas increase and that of mangoes remain constant and the income of the consumer is also constant.
What changes will take place in budget line?
i. Slope of the budget line changes
ii. Vertical intercept changes
iii. Horizontal intercept changes
iv. Budget line shifts outwards
Choose correct option

i, iii

The correct answer is Option 2: i, iii

Here's why:

• i. Slope of the budget line changes (correct): When the price of bananas increases, you can buy fewer bananas with the same amount of money. This reduces the trade-off between bananas and mangoes, causing the budget line to rotate inwards (become steeper).

• ii. Vertical intercept changes (incorrect): The vertical intercept represents the maximum quantity of mangoes that can be purchased with the given income. Since the price of mangoes remains constant and income doesn't change, the consumer can still buy the same amount of mangoes. Therefore, the vertical intercept remains the same.

• iii. Horizontal intercept changes (correct): The horizontal intercept represents the maximum quantity of bananas that can be purchased with the given income. Since the price of bananas increases, you can buy fewer of them. This reduces the horizontal intercept.

• iv. Budget line shifts outwards (incorrect): An outward shift of the budget line would indicate an increase in purchasing power. This happens when income increases or prices of both goods decrease. In this scenario, only the price of bananas increases, so the budget line cannot shift outwards. 

Therefore, the price increase of bananas will cause the budget line to rotate inwards (steeper slope) and reduce the horizontal intercept (fewer bananas affordable). The vertical intercept (mangoes affordable) will remain unchanged.

Slope of the budget line changes as, slope is denoted by the ratio between the prices of the 2 commodities. Change in the price of banana resulted in the change in the slope of budget line. Whereas, due to increase in the price of bananas, there is an inward swing in the budget line causing the horizontal intercept to change.