Thomas consumes coffee (C) and doughnuts (D). His budget line was described by the equation D = 20 - 2C. At a later time, his budget line could be described by the equation D = 10 - C. The change between the earlier budget line and the later could be explained by the fact that
A) the price of coffee and Thomas's income both increased.
B) the price of coffee increased and Thomas's income decreased.
C) the price of coffee decreased and Thomas's income increased.
D) the price of coffee and Thomas's income both decreased.
E) Thomas's utility for doughnuts decreased.

Question

Quizplus · Accepted Answer

The change in the budget line can be seen from the different intercepts for the variable D. The intercept for the later budget line is lower than the earlier budget line, indicating a decrease in income. The decrease in income is likely the result of a decrease in Thomas's purchasing power, either from a price increase for coffee or a decrease in income. The decrease in income resulted in a lower budget for doughnuts, as reflected in the lower intercept for the budget line.

Thomas Consumes Coffee (C) and Doughnuts (D)