Question 1

How does an increase in income affect a consumer's budget line?

Accepted Answer

When income increases, the consumer's budget constraint expands. Both the x-intercept and y-intercept of the budget line shift outward, creating a new budget line parallel to the original. This allows the consumer to purchase larger quantities of both goods. Previously unaffordable bundles become accessible, increasing purchasing power and expanding the set of available consumption choices.

Question 2

What happens to purchasing power when a consumer's income decreases?

Accepted Answer

A decrease in income reduces purchasing power, shifting the budget line inward toward the origin. Both intercepts move closer to zero, limiting the quantities of goods the consumer can afford. Previously affordable bundles may become unattainable. The consumer faces a more restricted set of consumption combinations and must choose from fewer options.

Question 3

Does the slope of the budget line change when income changes?

Accepted Answer

No, the slope of the budget line remains unchanged when income changes. Since relative prices of the two goods stay constant, the rate at which a consumer can trade one good for another remains the same. The new budget line is parallel to the original, maintaining the same trade-off rate between goods regardless of income level.

Question 4

How does income change affect consumer satisfaction levels?

Accepted Answer

Income increases allow consumers to reach higher indifference curves, representing greater satisfaction. With more purchasing power, consumers can afford combinations of goods that provide higher utility. Conversely, income decreases force consumers to lower indifference curves with reduced satisfaction. The ability to attain different indifference curves directly reflects changes in consumer welfare resulting from income adjustments.

Question 5

What is the relationship between income changes and consumer buying patterns?

Accepted Answer

Income changes directly influence buying patterns by altering purchasing capacity. When income rises, consumers can buy more of both goods, shifting their consumption bundles. When income falls, consumers reduce purchases of both goods. These income-driven changes in buying capacity reshape the combinations of goods consumers can afford and choose, affecting overall consumption decisions.

Question 6

Why do both intercepts of the budget line shift when income changes?

Accepted Answer

The x-intercept and y-intercept both shift because they represent the maximum quantities of each good a consumer can purchase with their entire budget. When income doubles, the consumer can buy twice as much of either good if spending entirely on that good. When income halves, maximum quantities are cut in half. Both intercepts move proportionally with income changes.

Question 7

How can income changes create new affordable consumption bundles?

Accepted Answer

Income increases expand the budget set, making previously unaffordable bundles accessible. For example, if income doubles from $200 to $400, bundles that cost $300 become affordable. The outward shift of the budget line creates a larger feasible region. Consumers can now select from combinations that were beyond their reach before, enabling movement to higher satisfaction levels.

Factors Affecting Budget Constraint II

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