Q1. What does the intercept of the budget line on X -axis show?
Ans: The horizontal intercept of budget line is (M/Px) where M is the money income and Px is the price of commodity x. Therefore, M/Px denotes the maximum amount of ‘x’ that can be purchased by spending entire income.
Q2. What does the intercept of the budget line on y- axis show?
Ans: The vertical intercept of budget line is M/Py. Therefore, M/Py denotes the maximum amount of ‘y’ that can be purchased by spending the entire income.
Q3. What does the slope of the budget line measure?
Ans. The slope of the budget line is (- Px/Py) which is the negative of the ratio of the prices of the two commodities. The magnitude of the slope tells us the rate at which the two goods can be substituted for each other without changing the total amount of money spent.
Q4. Explain graphically the impact of the following changes on the budget line?
Px increases (Py & M constant)
Py increases (Px & M constant)
Px, Py, M increases equiproportionately
Px declines (Py & M constant)
Py declines (Px & M constant)
- As Px increases, the x intercept i.e. M/Px declines but M/Py remains constant. Therefore, the budget line rotates clockwise pivoting around point B*.
- As Py increases, the y intercept i.e. M/Py declines but M/Px remains constant since there is no change in Px and M. Therefore the budget line rotates anticlockwise pivoting around point A*.
- As Px, Py and M increases in an equiproportionate manner , the budget line remains unchanged since M/Px and M/Py both remain intact due to increase in the same ratio.
- As Px declines the x intercept i.e. M/Px increases keeping M/Py constant since there is no change in Py and M. Therefore, the budget line rotates anticlockwise pivoting around point B*.
- As Py declines, M/Py increase but M/Px remains unchanged since there is no change in Px and M. Therefore budget line rotates clockwise pivoting around point A*.