Question

Assuming there are no quantity discounts or penalties, in moving downward or upward along a budget constraint, which of the following statements is true?

1) Consumer income varies but the prices of the goods are constant
2) Consumer income is constant but the prices of the goods vary
3) Consumer income is constant
4) The prices of the goods are constant

Answer 1

The movement along a budget constraint implies that consumer income remains constant while the prices of the goods vary, affecting the quantity of goods a consumer can purchase with a fixed income.

Step-by-step explanation:

When moving along a budget constraint, it's important to understand how changes in income and prices affect consumption choices. The correct statement regarding a movement along the budget constraint is that consumer income is constant but the prices of the goods vary. Therefore, when a consumer moves upward or downward along the budget constraint, their income remains the same, but they are facing different price levels for the goods in question.

For instance, if the price of a good decreases, the budget constraint will pivot outwards, allowing the consumer to buy more of that good, or to buy more of other goods, while maintaining the same overall level of spending. If the price increases, the consumer can buy less of the good or must reduce the quantity of other goods they purchase to stay within their budget. Income affects the entire budget constraint's position, while price changes affect the slope of the budget constraint.