The quantity of good M is measured along the vertical axis, and the quantity of good N is measured along the horizontal axis. If the prices of both goods M and N declines by 50% each, then the budget line
A) shifts inward to the left by 50%.
B) shifts outward to the right by 50%.
C) shifts outward to the right by 100%.
D) rotates clockwise by 180 degrees.

Question

Quizplus · Accepted Answer

When the prices of both goods decline by 50%, the budget line will shift outward to the right by 100% because the consumer will be able to afford twice the quantity of each good with the same budget. The slope of the budget line will remain the same, as it depends on the relative prices of the two goods, not their absolute prices. Therefore, the optimal choice of the consumer will also change, but it will depend on their preferences and the new prices of the goods.

The Quantity of Good M Is Measured Along the Vertical