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Chapter 6: Q.12RQ (page 152)

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

Short Answer

Expert verified

The budget constraint shift in a parallel way because the purchasing power of the both the goods increases simultaneously.

Step by step solution

01

Step 1. Introduction:

A budget constraint, also known as a budget line, depicts the potential bundles of two commodities that are affordable provided a customer's limited revenue.

02

Step 2. Explanation:

A modification in income can result in a parallel shift in budget constraints because as income rises, it becomes convenient to acquire additional goods as the individual's purchasing power rises. The more revenue one has, the more they buy. In contrast, when income falls, we see a reduction in the number of goods or services acquired.

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Most popular questions from this chapter

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

As a college student you work at a part-time job, but your parents also send you a monthly “allowance.” Suppose one month your parents forgot to send the check. Show graphically how your budget constraint is affected. Assuming you only buy normal goods, what would happen to your purchases of goods?

Jeremy is deeply in love with Jasmine. Jasmine lives where cell phone coverage is poor, so he can either call her on the land-line phone for five cents per minute or he can drive to see her, at a round-trip cost of \(2 in gasoline money. He has a total of \)10 per week to spend on staying in touch. To make his preferred choice, Jeremy uses a handy utilimometer that measures his total utility from personal visits and from phone minutes. Using the values in Table 6.6, figure out the points on Jeremy’s consumption choice budget constraint (it may be helpful to do a sketch) and identify his utility-maximizing point.

Round TripsTotal UtilityPhone MinutesTotal Utility
0000
18020200
215040380
321060540
426080680
5300100800
6330120900
7200140980
81801601040
91601801080
101402001100

The rules of politics are not always the same as the rules of economics. In discussions of setting budgets for government agencies, there is a strategy called “closing the Washington Monument.” When an agency faces the unwelcome prospect of a budget cut, it may decide to close a high-visibility attraction enjoyed by many people (like the Washington Monument). Explain in terms of diminishing marginal utility why the Washington Monument strategy is so misleading. Hint: If you are really trying to make the best of a budget cut, should you cut the items in your budget with the highest marginal utility or the lowest marginal utility? Does the Washington Monument strategy cut the items with the highest marginal utility or the lowest marginal utility?

If a 10% decrease in the price of one product that you buy causes an 8% increase in quantity demanded of that product, will another 10% decrease in the price cause another 8% increase (no more and no less) in quantity demanded?
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