Chapter 10, Problem 3P

To determine

Concept Introduction:

Budget Constraint: It is defined as the combination of all goods that a consumer can afford, given the price of goods and his total income. The formula for the budget constraint is:

Here,

• is the quantity of good X.
  
• is the quantity of good Y.
  
• is the total income.
  
• is the price of good X.
  
• is the price of good Y.
  

• If the total expenditure is equal to the total income, then it is within the consumption possibilities and it lies on the budget line.
• If the total expenditure is less than the total income, then it is within the consumption possibilities, but lies below the budget line.
• If the total expenditure is more than the total income, then it is out of the consumption possibilities and lies above the budget line.

Budget Line: It is defined as the combination of all the goods that a consumer can buy exhausting all his income. Formula for the budget line is:

Here,

• is the quantity of good X.
  
• is the quantity of good Y.
  
• is the total income.
  
• is the price of good X.
  
• is the price of good Y.