Exhibit 21-8

-Refer to Exhibit 21-8.If the price of good X falls,the budget constraint moves from budget constraint
A) 1 to 2.
B) 3 to 2.
C) 3 to 1.
D) 1 to 3.

Question

Exhibit 21-8
 
-Refer to Exhibit 21-8.If the price of good X falls,the budget constraint moves from budget constraint
A) 1 to 2. 
B) 3 to 2. 
C) 3 to 1. 
D) 1 to 3.

Quizplus · Accepted Answer

When the price of good X falls, the consumer's purchasing power increases, allowing them to purchase more of both goods X and Y. This results in a outward shift of the budget constraint from constraint 1 to constraint 3. The optimal choice for the consumer in this case will be the point where the new budget constraint (constraint 3) is tangent to the highest indifference curve. Therefore, the best choice is at the point where the indifference curve IC2 is tangent to constraint 3, which is at point D.

Exhibit 21-8 -Refer to Exhibit 21-8.If the Price of Good X Falls,the