Relation between the price and consumption of goods using the budget line.
Explanation of Solution
Budget line shows all the possible combinations of goods and services that can be purchased with the entire income, at a given price level. When the price of one commodity reduces, an individual can purchase both goods at a lower price. Therefore, he can buy additional quantity of both goods. On another point of view, a reduction in price means increase in relative income although the budget line remains the same.
Thus, people purchase more quantity of both goods when the price of a good reduces.
Budget line: Budget line refers to all the possible combinations of goods and services that can be purchased with the entire income, at a given price level.
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Chapter 6 Solutions
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