Question

Suppose you only consume food and clothing, and clothing is plotted on the vertical axis. Also, you purchase food at a fixed price (P F), but the price of clothing declines as you buy in larger quantities (i.e., quantity discounts). What does the budget line look like in this case?

Answer 1

For a budget constraint with a fixed price for food and a quantity discount on clothing, the budget line would be a convex curve towards the food axis, starting steep and becoming flatter as more clothing is purchased.

Step-by-step explanation:

In a typical budget constraint scenario, consumers choose how to allocate their fixed income between two goods. When one good is priced at a fixed price and the other has a quantity discount (its price decreases as more is purchased), the budget line behaves differently than the usual straight line.

In this specific case, where clothing is on the vertical axis and has a declining price, the budget line would start at some point on this axis, depending on the amount of income and the initial price of clothing. As more clothing is purchased, the incremental cost of clothing decreases, allowing the consumer to buy slightly more clothing for each unit of food given up, which would cause the budget line to bow outwards, creating a convex curve towards the axis representing food, which has a fixed price.

The slope of the budget line in this case is not constant. Initially, at lower quantities of clothing, the slope might be relatively steep, indicating a higher price of clothing. As more clothing is purchased and the price decreases due to the quantity discount, the slope becomes less steep (flatter), reflecting the lower marginal cost of clothing compared to food.

Answer 2

The correct answer is: The budget line is now convex to (bows in toward) the origin.

Step-by-step explanation:

Indifference curves are a set of combinations of goods that provide the same utility to the consumer. On a curve of indifference the consumer is indifferent between any of the baskets of goods presented to him.

A curve is convex to the origin when the line connecting two points of the curve passes over the indifference curve. This assumption cannot be demonstrated from the assumptions of preferences, but is based on the principle of diversity in consumption.