Question

Lisa buys pizza for $10 and soda for $2. She has income of $100. Her budget constraint will experience a parallel outward shift if which of the following events occur?

a. An increase in pizza prices
b. An increase in soda prices
c. An increase in Lisa's income
d. A decrease in Lisa's income

Answer 1

An increase in Lisa's income leads to a parallel outward shift in her budget constraint, allowing her to purchase more goods and achieve a higher level of utility.

Step-by-step explanation:

Lisa's budget constraint will experience a parallel outward shift if her income increases. This is because an increase in income allows Lisa to afford more goods than before, without the prices of those goods having changed. On the other hand, an increase in the prices of either pizza or soda or a decrease in Lisa's income would shift the budget constraint inward, indicating less purchasing power.

Graphically, when income increases, the budget constraint shifts to the right and is now tangent to a higher indifference curve, which shows a higher level of utility. Conversely, a decrease in income would shift the budget constraint to the left, touching a lower indifference curve, and thus a lower level of utility. Therefore, the correct answer is c. An increase in Lisa's income.