Question

Suppose a consumer has an income of $16, the price of A is $2, and the price of B is $1. Which of the following combinations is on the consumer's budget line?

1) 4 units of A and 8 units of B
2) 6 units of A and 6 units of B
3) 8 units of A and 4 units of B
4) 10 units of A and 2 units of B

Answer 1

To determine the consumer's budget line, we can use the equation Income = (Price of A * Quantity of A) + (Price of B * Quantity of B). By substituting the given quantities for options 1 to 4, we can determine which combination satisfies the budget line equation.

Step-by-step explanation:

The consumer's budget line represents all the possible combinations of goods A and B that the consumer can afford given their income and the prices of the goods. To determine the budget line, we can use the formula:

Income = (Price of A * Quantity of A) + (Price of B * Quantity of B)

Substituting the given values, we have:

16 = (2 * Quantity of A) + (1 * Quantity of B)

Rearranging the equation to solve for Quantity of B, we get:

Quantity of B = 16 - 2 * Quantity of A

Now we can substitute the given quantities for options 1 to 4 and check which combination satisfies the budget line equation. By substituting the given quantities for option 1, we get:

Quantity of B = 16 - 2 * 4 = 8

Since this combination satisfies the budget line equation, option 1 is on the consumer's budget line.