Question

1. If the price of (x) falls, the budget constraint

a. Shifts outward in a parallel fashion.
b. Shifts inward in a parallel fashion.
c. Rotates outward about the x-intercept.
d. Rotates outward about the y-intercept.

2. If the prices of all goods increase by the same proportion as income, the quantity demanded of good (x) will

a. Decrease
b. Increase
c. Remain unchanged
d. Change in a way that cannot be determined from the information given

Answer 1

1. If the price of (x) falls, the budget constraint

• c. Rotates outward about the x-intercept.

If the price of a good X decreases, but the price of a good Y does not, then a consumer will be able to purchase a larger quantity of good X, but the same quantity of good Y. The Y-intercept will remain the same, but the X-intercept will shift outward.

2. If the prices of all goods increase by the same proportion as income, the quantity demanded of good (x) will

• c. Remain unchanged

Lets say you have $100 and you buy 20 hamburgers. If your income increases to $110 (10% increase), but the price of hamburgers increase to $5.50, then inflation offsets any change in income. You will still be able to buy only 20 hamburgers, so your real income didn't change, only your nominal income changed.