Budget Constraints and Changes in Economics

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Questions and Answers

What happens to the budget line when the price of good 1 increases?

The budget line becomes flatter.

The budget line shifts outward.

The budget line remains unchanged.

The budget line becomes steeper. (correct)

If both prices of goods 1 and 2 are doubled, what is the effect on the budget line?

The budget line shifts inward by a factor of one-half. (correct)

The shape of the budget line changes but the intercepts do not.

The budget line stops reflecting the consumer's budget.

The budget line shifts an equal distance outward.

When analyzing the budget line, how does a decrease in income while both prices increase affect the line?

The budget line will shift outward.

The budget line will stay the same.

The budget line will pivot around the horizontal intercept.

The budget line will shift inward. (correct)

How does an increase in the price of good 2 compared to good 1 affect the slope of the budget line?

The slope becomes steeper if price 2 increases more than price 1. Signup and view all the answers

Which statement correctly describes the relationship of multiplying both prices and income by the same constant?

The budget line does not change at all. Signup and view all the answers

What is the effect on both intercepts of the budget line when both prices increase and income decreases?

Both intercepts decrease. Signup and view all the answers

What does the equation $p1 x1 + p2 x2 = m$ represent in the context of a budget line?

Total expenditure on goods. Signup and view all the answers

What is the significance of pegging one price or income to a fixed value in the context of the budget line?

It simplifies the representation of the budget constraint. Signup and view all the answers

What happens to the budget line when income increases?

The budget line shifts outward parallelly. Signup and view all the answers

What effect does an increase in the price of good 1 have on the budget line?

The slope of the budget line increases. Signup and view all the answers

How does decreasing income affect the budget line?

It causes a parallel inward shift of the budget line. Signup and view all the answers

If prices of both goods remain constant, what is the result of an increase in income?

The choice set expands. Signup and view all the answers

What remains unchanged when income increases?

The slope of the budget line. Signup and view all the answers

If the price of good 1 increases but the price of good 2 remains constant, what happens to the budget line?

The line becomes steeper. Signup and view all the answers

When the price of good 2 is held constant, what effect does an increase in the price of good 1 have on consumers' maximum consumption of good 2?

It remains the same. Signup and view all the answers

How is the economic cost of consuming more of good 1 represented?

By the quantity of good 2 forgone when good 1 consumption increases. Signup and view all the answers

How does receiving a $200 food stamp grant affect a household's budget line?

Shifts the budget line to the right by $200. Signup and view all the answers

What is a characteristic of food stamps as described?

They act as a lump-sum subsidy. Signup and view all the answers

If a consumer's income increases while all prices remain the same, what happens to the consumer's budget line?

It shifts outward in a parallel manner. Signup and view all the answers

What is the effect of balanced inflation on a consumer's budget set?

It does not change the budget set. Signup and view all the answers

What happens when one price declines while all other prices stay constant?

The consumer's budget set widens. Signup and view all the answers

Why can't food stamps simply be considered cash?

They can only be spent on specific goods. Signup and view all the answers

What is implied when a budget line shifts outward due to increased income?

The consumer can afford all previous goods plus additional options. Signup and view all the answers

When analyzing changes in the budget set, what is a key observation regarding price increases?

They change the relative affordability of goods. Signup and view all the answers

Study Notes

Budget Constraint Changes

Budget lines illustrate the combinations of goods a consumer can afford.
Changes in prices and income shift the budget line.

Income Changes

Increasing income shifts the budget line outward (parallel).
Decreasing income shifts the budget line inward (parallel).
Income changes affect the vertical intercept but not the slope.

Price Changes

Increasing price 1, holding other factors constant, makes the budget line steeper.
The vertical intercept does not change with a price 1 increase, as the maximum amount of good 2 remains unaffected.
The horizontal intercept shifts inward when price 1 increases, reflecting a reduced maximum consumption of good 1.
The slope of the budget line is affected by the ratio of prices; if p1 increases, the slope steepens.

Food Stamps as a Subsidy

Food stamps are a lump-sum subsidy, allowing more food consumption regardless of other spending.
The budget line shifts right by the value of the food stamp grant.
The slope remains unchanged because the opportunity cost of food remains constant.
Food stamps cannot be sold, limiting the maximum spending on other goods

Budget Line Changes: Multiple Price Changes

Doubling both prices is like halving income, thus shifts the budget line inward.
Multiplying both prices by 't' is equivalent to dividing income by 't'.
Changing both prices and income simultaneously shifts the budget line inward if p1 and p2 increase and m decreases.
The slope changes depending on the relative increase of the two prices.

Numeraire Concept

One variable (price or income) is redundant in defining a budget line.
The same budget set can be described by different combinations of prices and income using a fixed numeraire.

Budget Set Invariance

Multiplying all prices and income by a positive number does not change the budget set.
This means perfect inflation (all prices and income rising at the same rate) doesn't impact individual budget sets or optimal choices.

Consumer Welfare

Increased income with static prices expands the budget set; a consumer is at least as well off at the higher income.
A price decrease with static prices leads to a wider budget set and the consumer must be at least as well off.

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Description

Explore the intricacies of budget constraints in consumer economics. This quiz covers how changes in income and prices shift the budget line, as well as the implications of food stamps as a subsidy. Test your understanding of these fundamental economic concepts.