Chapter 21, Problem 1CQQ

To determine

The cause for a parallel shift in the budget constraint.

Answer to Problem 1CQQ

Option 'd' is correct.

Explanation of Solution

Option (d):

The budget constraint is the constraint which is due to the budget of the individual. The human wants and needs are unlimited and when the budget of the individual is not unlimited, it will lead to the constraint of needs and this constraint raised due to the limited budget is known as the budget constraint of the individual. Thus, a budget constraint will represent all the possible combinations of two commodities that an individual can consume at the given market prices and with all his income in hand.

Here, the budget of the consumer is $100, the price of pizza is $10 and that of soda is $2. Thus, the consumer can buy 10 pizzas and no soda or 50 sodas and no pizza when the whole income is spend on either of the commodities only. When the price of any one increases or decreases, it will lead to the shift in the intercept of the budget constraint which represents that commodity, in order to have a parallel shift outwards, the price of both the commodities should double and the total income of the consumer should increase by four times. Since option 'd' gives such values, option 'd' is correct.

Option (a):

When price of the items falls to half of the previous level along with the income, there will be no change in the quantities demanded and thus there will be no shift in the budget constraint which means that option 'a' is incorrect.

Option (b):

When price of the items increases to twice of the previous level and the income remains the same, there will be a decline in the quantities demanded and thus there will an inward shift in the budget constraint which means that option 'b' is incorrect.

Option (c):

When there is an increase in the income to $120 and the decrease in the price levels of soda to $1 and the pizza to $8 take place, these will lead to an unparallel shift in the budget constraint which means that the option 'c' is incorrect.

Economics Concept Introduction

Concept introduction:

Budget constraint: It represents all the combinations of two goods that the consumer can consume with the given price level and the income in the hands of the individual.