Suppose that a consumer purchases just two goods, X and Y. The ratio of the price of good X to the price of good Y is the:
A) Intercept on the Y axis of the budget line
B) Intercept on the X axis of the budget line
C) Size of the shift in the budget line
D) Slope of the budget line

Question

Quizplus · Accepted Answer

The slope of the budget line represents the trade-off between the two goods. If the price of good X increases relative to good Y, the slope of the budget line will become steeper (i.e. the absolute value of the slope will increase), reflecting the fact that the consumer must give up more units of good Y to purchase an additional unit of good X. Likewise, if the price of good X decreases relative to good Y, the slope of the budget line will become flatter (i.e. the absolute value of the slope will decrease), reflecting the fact that the consumer can now purchase more units of good X for each unit of good Y that is given up. Therefore, the ratio of the price of good X to the price of good Y determines the slope of the budget line.

Suppose That a Consumer Purchases Just Two Goods, X and Y