As shown in the figure below a shift in the budget line from AB to AC represents:
A)an increase in the price of good 1.
B)an increase in the price of good 2.
C)a decrease in the price of good 1.
D)a decrease in the price of good 2
E)none of the above.

Question

As shown in the figure below a shift in the budget line from AB to AC represents: 
A)an increase in the price of good 1. 
B)an increase in the price of good 2. 
C)a decrease in the price of good 1. 
D)a decrease in the price of good 2 
E)none of the above.

Quizplus · Accepted Answer

A shift in the budget line to the right represents an increase in income, whereas a shift to the left would represent a decrease in income. However, in this case, the income is assumed constant, so the only explanation for a shift in the budget line is a change in the relative price of the two goods. When the price of good 1 decreases, the budget line pivots outward or shifts to the right, as shown in the figure, so that the consumer can now afford more of both goods. Conversely, if the price of good 2 increases, the budget line would shift to the left, restricting the consumer's ability to purchase both goods. Therefore, the correct answer is C, a decrease in the price of good 1.

As Shown in the Figure Below a Shift in the Budget