6A.2 The Budget Line

Question 1

What is a budget line and what does it show?

Answer 1

The budget line shows the quantities of goods available to a consumer given money income and the prices of goods.

The budget line shows all combinations of products that are available to the consumer given his money income and the prices of the goods that he purchases.

Question 2

The budget line has several important properties which are…

Answer 2

Points on the budget line indicate bundles of products that use up the consumer’s entire income. (Try, for example, the point 20C, 20F.)

Points between the budget line and the origin indicate bundles of products that cost less than the consumer’s income. (Try, for example, the point 20C, 10F.)

Points above the budget line indicate combinations of products that cost more than the consumer’s income. (Try, for example, the point 30C, 40F.)

Question 3

How do we measure the opportunity cost of two items.

Answer 3

The opportunity cost of food in terms of clothing is measured by the (absolute value of the) slope of the budget line, which is equal to the relative price ratio, pF/pC.