What effect will higher prices for cars and lower prices for homes have on the budget line?
A) The budget line will shift outward.
B) Both intercepts will change, but the slope will not change.
C) The slope and both intercepts will change.
D) The intercept associated with car ownership will decrease, but the intercept associated with home ownership will remain the same.

Question

Quizplus · Accepted Answer

The budget line represents the combination of goods a consumer can purchase with a given budget. If car prices increase and home prices decrease, both the intercepts (which represent the maximum amount of each good that can be purchased if all income is spent on that good alone) and the slope (which represents the rate at which one good can be substituted for another) of the budget line will change. The slope changes because the relative price of cars to homes changes.

What Effect Will Higher Prices for Cars and Lower Prices