Final answer:
True, if a consumer spends their entire income, they are on their budget line, which indicates the combinations of goods and services a consumer can purchase within their income and prices of goods to maximize utility.
Step-by-step explanation:
True, when a consumer spends all of their income, they are indeed consuming a basket of goods on their budget line. The budget line represents all possible combinations of goods and services that a consumer can purchase given their income levels and the prices of goods. When the entire income is spent, it means that the consumer is utilizing their full disposable income to obtain the maximum total utility from their purchases, falling precisely on their budget constraint.
In the context of Figure 6.3, the utility-maximizing choice on the original budget constraint is M. If a consumer's income changes, their budget constraint shifts, and they will make different consumption choices, such as N, P or Q, depending on whether the goods are normal or inferior. Nonetheless, each of these choices lies on the new budget line, which indicates full utilization of the increased or decreased income.
It's also important to note that consumption smoothing suggests that households tend to spread out their consumption over different goods and services rather than focusing all their additional income on a single good. This means that changes in income would alter the budget constraint, reflecting new combinations and quantities of goods that households will purchase to maximize their utility.