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Question -

How does the budget line change if the price of good 2 decreases by a rupee but the price of good 1 and the consumer’s income remain unchanged?



Answer -

P1 = Rs4

P2 = Rs 5

M = Rs20

Since the income and the price of good 1 areunchanged, the decrease in the price of good 2 will increase the verticalintercept of the budget line. The new budget line will also pivot outwardsaround the same horizontal intercept.

Horizontal intercept

Vertical intercept 

Slope 

The slope of the new budget line will be more and the newbudget line will be steeper than the original one.

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