In year 1, the price of good x was 1, the price of good y was 1, and income was
ID: 1098903 • Letter: I
Question
In year 1, the price of good x was 1, the price of good y was 1, and income was 30. In year
2, the price of x was 6, the price of good y was 5, and income was 30. On a graph with x on the
horizontal axis and y on the vertical, the new budget line is: (please explain or show work. i already have the answer, just don't know how to get it)
(a) flatter than the old one and lies below it.
(b) flatter than the old one and lies above it.
(c) steeper than the old one and lies below it.
(d) steeper than the old one and lies above it.
(e) none of the above.
Explanation / Answer
according to year 1,
budget line is 1*x+1*y =30
=> x+y =30
slope of this line =-1
in year 2, budget line is
6*x+5*y =30
and slope of this line = -6/5 =-1.2
as magnitude of slope of second line is gretaer than first line. hence second line is steeper and as intercepts are lesser for second line, it lies below the first line, hence the new budget line is steeper than the old one and lies below it
hence ans : c)steeper than the old one and lies below it