Suppose the budget constraint is given by 200P + 50S = 400, where P is pizza and S is spinach. If the prices of S and P increase by 10% each then the budget curve will shift to the
A)right with the same slope.
B)left with the same slope.
C)right but the slope will be different than before.
D)left but the slope will be different than before.

Question

Quizplus · Accepted Answer

When the prices of both goods increase by 10%, the new budget constraint becomes 220(1.1)P + 55(1.1)S = 400. Simplifying this expression gives us: 242P + 60.5S = 400. Notice that this new constraint is parallel to the original constraint because the coefficients of P and S did not change. However, the new constraint intersects the axes at different points, specifically at (400/242, 0) and (0, 400/60.5) respectively. Since these points are closer to the origin than the original constraint, the new constraint shifts to the left with the same slope. Therefore, the correct answer is B.

Suppose the Budget Constraint Is Given by 200P + 50S