Why does MRS diminish?
Consumption Possibilities- Budget Line
Budget Line Budget Line Equation, Where, Px= per unit price of commodity X Py = per unit price of commodity Y X = amount of commodity X Y= amount of commodity Y M= stands for money income > The vertical intercept or y-intercept is M/P y That is, > The horizontal intercept or x-intercept is M/P y That is,
– Y) y
- - - Example Suppose, consumer has got income of tk 50, the price of commodity X and Y is tk 10 and tk 5 respectively. The budget line becomes: • The vertical intercept is: 50/5=10 • The horizontal intercept is: 50/10= 5 • The slope of BL is:
Effect of Changes in Price on Budget Line Suppose BL is the original budget line for given certain prices of goods X and Y and certain income. • if Px falls and all other things remain same, consumer will be able to buy more of good X than before with his income. The quantity of X increases from OL to OL’. Since the price of Y remains same the quantity of Y purchase will remain same, as OB. And there will be no shift of point B. As a result the BL line rotates to the right, and the new budget line is OL’. • On the other hand if Px rises and all other things remain same, consumer will be able to buy less of good X than before with his income. The quantity of X decreases from OL to OL’’. Since the price of
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- Spring '15