How will an increase in a consumer’s income change her budget line?

Question

BlackTom AI · Accepted Answer

To analyze how an increase in a consumer’s income affects the budget line, we start from the basic definition: the budget line represents all combinations of goods that a consumer can purchase given their income and current prices. When prices are held constant and income rises, the set of affordable bundles expands, so the feasible region moves outward.

Option analysis:

- The budget line will shift outward. This statement is accurate under the standard model: higher income while prices stay the same leads to a parallel outward shift of the budget line because the consumer can now afford more of both goods (assuming both goods are normal goods and there is no change in relative prices). The slope, determined by the price ratio, remains unchanged, so the shift is parallel rather than a rotation.

If there were other options, we would evaluate them similarly:

- A claim that the budget line shifts inward would imply a decrease in income or an increase in prices relative to income, which is not the case when income increases with prices constant.

- A claim that the budget line rotates would suggest a change in relative prices rather than income; a pure income increase does not alter the relative prices, hence no rotation occurs, only a parallel shift outward.

- A claim about any nonlinear or kinked shift would contradict the standard assumption of constant prices and linear budget constraints in the basic model; income changes produce linear, parallel shifts, not curved or kinked lines.

How will an increase in a consumer’s income change her budget line?Single choice

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