Suppose a consumer is initially endowed with a positive amount of two goods, sells some of one to get more of the other, and has no other sources of income.If the price of one good falls, his new budget line is everywhere above his old budget line.

Question

Quizplus · Accepted Answer

When the price of one good falls, the consumer can afford more of that good for the same amount of money, effectively rotating the budget line outward from the axis of the good whose price has decreased. The new budget line is not everywhere above the old one; instead, it intersects the old budget line at the point representing the initial endowment.

Suppose a Consumer Is Initially Endowed with a Positive Amount