Exercise 1
BUDGET CONSTRAINT


I. Objectives

II. Data

P1 P2 Y

Horizontal
intercept
Vertical
intercept
Slope

III. Questions

  1. Choose values for prices and income. Sketch the corresponding budget constraint. Indicate the intercepts and slope.
    [Note: Slope equals -P1/P2.]

  2. "An increase in P1 will cause the horizontal intercept to rise and the budget constraint to rotate outwards." Anything wrong with the statement? Provide a sketch.

  3. A decrease in consumer's income will cause both intercepts to [ rise / fall ] and the slope of the budget constraint to
    [ increase / decrease / remain unchanged ]. Sketch.

  4. If Good 2 becomes cheaper, the vertical intercept will [ increase / decrease / stay the same ] and the budget constraint will become [ steeper / flatter ]. Sketch.

Index