Suppose the price of a pizza is R80, the price of a milk shake is R20, and the consumer's weekly income is R320. Suppose we have constructed the consumer's budget line with pizzas on the vertical axis and milk shakes on the horizontal axis. Given this information, if the consumer's income rises to R480, then what will happen to the consumer's budget line?

Question

Quizplus · Accepted Answer

When the consumer's income increases, their budget line will shift outwards, allowing them to purchase more pizzas and milk shakes. Specifically, the slope of the budget line will remain the same (since the prices of pizza and milk shakes have not changed), but the intercepts on both axes will increase. Using the formula for the budget line (income = quantity of pizza x price of pizza + quantity of milk shakes x price of milk shakes), we can solve for the intercepts at the new income level:

R480 = Qp x R80 + Qm x R20

When Qm = 0 (i.e. the consumer is only buying pizzas), Qp = 6. When Qp = 0 (i.e. the consumer is only buying milk shakes), Qm = 24. Therefore, the new intercepts are 6 pizzas per week on the vertical axis and 24 milk shakes per week on the horizontal axis.

Suppose the Price of a Pizza Is R80, the Price