Question 1

How does a price decrease affect a consumer's budget line?

Accepted Answer

When a product's price decreases, the consumer's purchasing power increases. The budget line rotates outward, extending the x-intercept and flattening the slope. For example, if food price drops to $5 per unit, John can buy 40 units instead of fewer, allowing him to purchase more food with the same $200 budget while sacrificing less clothing per food unit.

Question 2

What happens to the budget line when a product's price increases?

Accepted Answer

A price increase reduces purchasing power and rotates the budget line inward, shortening the x-intercept and steepening the slope. When food costs $20 per unit instead of less, John can afford only 10 units with his $200 budget. He must now sacrifice more clothing units to buy each additional food unit, reflecting reduced purchasing power.

Question 3

Why does the slope of a budget line change when only one product's price changes?

Accepted Answer

The slope represents the trade-off rate between two goods. When one product's price changes while the other remains constant, the relative prices shift, altering how many units of one good must be sacrificed for another. This changes the slope's steepness. However, if both prices change proportionally in the same direction, the slope remains unchanged.

Question 4

How does purchasing power relate to income and product prices?

Accepted Answer

Purchasing power depends on both income and product prices. A student with $100 can buy five books at $20 each. When book price falls to $10, purchasing power increases, allowing ten books. When price rises to $25, purchasing power decreases to four books. Price changes directly affect how much a consumer can purchase with fixed income.

Question 5

What is the relationship between budget line rotation and the x-intercept?

Accepted Answer

The x-intercept shows the maximum quantity of a good purchasable when spending the entire budget on it. Price changes directly alter this intercept. Lower prices extend the x-intercept outward, while higher prices move it inward. This rotation reflects changes in purchasing power and determines the new budget line position relative to the original constraint.

Question 6

How can proportional price changes affect the budget line's slope?

Accepted Answer

When both product prices change proportionally and in the same direction, the slope of the budget line remains unchanged. For instance, if both prices are reduced to half their original values, the relative price ratio stays constant, preserving the slope. Only the intercepts shift, moving the entire budget line parallel to its original position.

Question 7

What does the budget line reveal about consumer trade-offs between goods?

Accepted Answer

The budget line's slope indicates the trade-off rate between two goods, showing how many units of one good must be sacrificed to purchase an additional unit of another. When food price decreases, John sacrifices less clothing per food unit, flattening the slope. This slope change reflects altered relative prices and reveals the consumer's opportunity cost of choosing between goods.

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