Originally PX is $120 and PY is $80.True or false: If PX increases by $18 and PY increases by $12, thenew budget line will be shifted inward and parallel to the oldbudget line. Explain.
Question
Originally PX is 80.True or false: If PX increases by 12, thenew budget line will be shifted inward and parallel to the oldbudget line. Explain.
Solution
False. The budget line will not shift inward and parallel to the old budget line. Here's why:
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The budget line represents all combinations of goods X and Y that a consumer can afford given their income and the prices of X and Y.
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If the price of both goods X and Y increase, the consumer can afford less of both goods, assuming their income stays the same. This would cause the budget line to shift inward.
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However, the new budget line will not be parallel to the old budget line. The slope of the budget line represents the ratio of the prices of the two goods (PX/PY). If the prices of both goods increase but not by the same proportion (in this case, PX increases by 12), the slope of the budget line (PX/PY) will change. This means the new budget line will not be parallel to the old one.
So, the statement is false. The new budget line will shift inward, but it will not be parallel to the old budget line.
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