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Chapter 6: Q.12 (page 152)

Why does a change in income cause a parallel shift in the budget constraint?

Short Answer

Expert verified

Because your income increases, so do the number of items you can buy, and the same is true if your income declines, a change in income creates a simultaneous shift in budget limitation.

Step by step solution

01

Definition

Income

The change in an individual's income has the opposite effect on their consumption. Individual households' consumption decisions are heavily influenced by their income.

02

Explanation

A change in income might result in a concurrent shift in budget constraints since it becomes easier to acquire additional things as income rises. The more money one has, the more things one can buy. When income falls, however, we witness a decline in the products/services purchased. The income elasticity of demand for each good you buy determines the income impact.

03

Step 3:Conclusion

Therefore, the budget limitation pivots from one of the end points when the price of one of the commodities changes.

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Most popular questions from this chapter

Income effects depend on the income elasticity of demand for each good that you buy. If one of the goods you buy has a negative income elasticity, that is, it is an inferior good, what must be true of the income elasticity of the other good you buy?

Bart and Lisa are both optimizing consumers in the markets for shirts and hats, where they pay \(100 for a shirt \)50 for a hat. Bart buys 8 shirts and 4 hats, while Lisa buys 6 shirts and 12 hats. From this information, we can infer that Bart鈥檚 marginal rate of substitution is ___ hats per shirt, and while Lisa鈥檚 is __.

a. 2;1

b. 2;2

c. 4;1

d. 4;2

Who determines how much utility an individual will receive from consuming a good?

At two points on an indifference curve,

a. the consumer has the same income.

b. the consumer has the same marginal rate of substitution.

c. the bundle of the goods cost the consumer the same amount.

d. the bundle of goods that yield the consumer same satisfaction.

Maya divides her income between coffee and croissants (both of which are normal goods). An early frost in Brazil causes a large increase in the price of coffee in the United States.

a. Show the effect of the frost on Maya鈥檚 budget constraint.

b. Show the effect of the frost on Maya鈥檚 optimal consumption bundle, assuming that the substitution effect outweighs the income effect for croissants.

c. Show the effect of the frost on Maya鈥檚 optimal consumption bundle, assuming that the income effect outweighs the substitution effect for croissants.
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