A consumer wants to consume two goods. The prices of the two goods are Rs 4
and Rs 5 respectively. The consumer’s income is Rs 20.
(i) Write down the equation of the budget line.
(ii) How much of good 1 can the consumer consume if she spends her entire
income on that good?
(iii) How much of good 2 can she consume if she spends her entire income on
that good?
(iv) What is the slope of the budget line?
Questions 5, 6 and 7 are related to question 4.
(i) P1 = Rs 4
P2 = Rs 5 M = Rs 20
Equation of the budget line = P1x1 + P2 + x2 =M
4x1+5x2 = 20
(ii) If Rs 20 is entirely spent on good 1, then the amount of good 2 demanded will be zero i.e., x2 = 0 as the consumer has no income left to spend on good 2.
4x1 + 5(0) =20
4x1 = 20 X1= X1 =5
(iii) If Rs 20 is entirely spent on good 2, then x1 = 0 , as the consumer has no income left to spend on good 1.
4(0) + 5x2 = 20
5x2 =
X2 = 4
Amount of good 2 consumed = 4 units
(iv) Slope of the budget line =
= 0.8
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