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Explain the budget line through a diagram.

Asked by Topperlearning User 25th April 2016, 12:47 PM
Answered by Expert

A line showing a set of bundles of good x1 and good x2 which a consumer can buy at the given income, M and the prices of two goods p1 and p2.


Quantity of good 1 is measured on the X axis and the quantity of good 2 is measured on Y axis. Any point on the diagram shows the bundle of two goods. The budget set is represented in a diagram which consists of all points on or below the straight line having the equation p1x1 + p2x2 = M.  This line consists of all bundles whose cost is equal to M. This line is called the budget line. This budget line is drawn on the assumptions that the consumers budget is Rs. 30, price of a good 1 = Rs 2 per unit and price of good 2 = Re 1 per unit.

Answered by Expert 25th April 2016, 2:47 PM
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