Question

Suppose Tyrone spends his entire income on books and clothing. If the prices of both books and clothing fall by 10%, which of the following statements is true?
A. The budget constraint shifts outward.
B. The budget constraint becomes steeper (the slope is larger in absolute value).
C. The budget constraint becomes flatter (the slope is smaller in absolute value).
D. Tyrone is not able to move to a new indifference curve.

Answer 1

Answer: A. The budget constraint shifts outward.

Explanation:

The budget constraint line shows the possible quantities of a good or service that a person can buy based on their income and the price of the good or service.

Points on the line can therefore be calculated by the formula:

= Income / Price

If the price decreases by 10%, it will lead to a situation where the budget constraint will shift outward because as shown by the formula, the points on the line will increase from having a smaller denominator.