A consumer has preferences over two goods, $U\left(x_{1}, x_{2}\right)$, where $p_{0} \widehat{x_{1}}+p_{1} x_{1}+p_{2} x_{2} \leq y$ where $p_{0}0$ and $\widehat{x_{1}}=1$ if positive amounts of $x_{1}$ are purchased and 0 otherwise. If both $x_{1}$
And $x_{2}$ are normal goods and $x_{1}0$ and $x_{2}0$, then a decrease in $p_{0}$ has the following effect.
A) Changes the relative price of the two goods: changes the slope of the budget line.
B) Has a negative income effect: shifts the budget line towards the origin.
C) Has a positive income effect: shifts the budget line away from the origin.
D) No effect.

Question

A consumer has preferences over two goods, $U\left(x_{1}, x_{2}\right)$, where $p_{0} \widehat{x_{1}}+p_{1} x_{1}+p_{2} x_{2} \leq y$ where $p_{0}>0$ and $\widehat{x_{1}}=1$ if positive amounts of $x_{1}$ are purchased and 0 otherwise. If both $x_{1}$
And $x_{2}$ are normal goods and $x_{1}>0$ and $x_{2}>0$, then a decrease in $p_{0}$ has the following effect.
A) Changes the relative price of the two goods: changes the slope of the budget line.
B) Has a negative income effect: shifts the budget line towards the origin.
C) Has a positive income effect: shifts the budget line away from the origin.
D) No effect.

Quizplus · Accepted Answer

The decrease in $p_{0}$ effectively increases the consumer's purchasing power as less money is required to start buying $x_{1}$, acting like an increase in income. This shifts the budget line away from the origin, allowing the consumer to potentially purchase more of both goods, assuming they are normal goods.

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A Consumer Has Preferences Over Two Goods $U\left(x_{1}, x_{2}\right)$ , Where $p_{0} \widehat{x_{1}}+p_{1} x_{1}+p_{2} x_{2} \leq y$