Question

Suppose Tyrone spends his entire income on books and clothing. If the prices of both books and clothing fall by 10%, which of the following statements is true?

A. The budget constraint shifts outward.
B. The budget constraint becomes steeper (the slope is larger in absolute value).
C. The budget constraint becomes flatter (the slope is smaller in absolute value).
D. Tyrone is not able to move to a new indifference curve.

Answer 1

When prices of both books and clothing fall by 10%, the consumer's purchasing power increases and the budget constraint shifts outward, allowing the consumer to afford more of both goods.

Step-by-step explanation:

When the prices of both books and clothing fall by 10%, it means that the consumer's purchasing power has increased. In this case, the budget constraint, which represents the different combinations of books and clothing that the consumer can afford, will shift outward. This means that the consumer can now afford to buy more of both books and clothing.

Option A is the correct statement because an outward shift in the budget constraint indicates an increase in purchasing power.

Answer 2

Answer: A. The budget constraint shifts outward.

Step-by-step explanation:

The budget constraint line shows the possible quantities of a good or service that a person can buy based on their income and the price of the good or service.

Points on the line can therefore be calculated by the formula:

= Income / Price

If the price decreases by 10%, it will lead to a situation where the budget constraint will shift outward because as shown by the formula, the points on the line will increase from having a smaller denominator.