Consider a budget for good x1 (on the horizontal axis) and x2 (on the vertical axis) when your economic circumstances are characterized by prices p1 and p2 and an exogenous income level I.
A:
Drawa budget line that represents these economic circumstances and carefully label the intercepts and slope.
The sketch of this budget line is given in Graph 2.3.

Graph 2.3: A budget constraint with exogenous income I
The vertical intercept is equal to how much of x2 one could by with I if that is all one bought €” which is just I/p2. The analogous is true for x1 on the horizontal intercept. One way to verify the slope is to recognize it is the €œrise€ (I/p2) divided by the €œrun€ (I/p1) which gives p1/p2 €”and that it is negative since the budget constraint is downward sloping.
(a) Illustrate how this line can shift parallel to itself without a change in I .
(b) Illustrate how this line can rotate clockwise on its horizontal intercept without a change in p2.
B: Write the equation of a budget line that corresponds to your graph in 2.3A.
(a) Use this equation to demonstrate how the change derived in 2.3A (a) can happen.
(b) Use the same equation to illustrate how the change derived in 2.3A(b) can happen.

Transcribed Image Text:

aslope=- X,