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IAI Actuarial Core Principles · Business Economics · Consumer demand and behaviour

A consumer spends a fixed monthly income on two goods, X and Y, with X on the horizontal axis. Which of the following changes would cause the budget line to pivot inwards around its vertical-axis intercept, leaving the maximum quantity of Y affordable unchanged?

A rise in the price of X alone makes the budget line pivot inwards around the vertical intercept. The maximum amount of Y affordable, income divided by the price of Y, is unchanged, while the maximum amount of X affordable falls.

  1. AA fall in income with both prices unchanged
  2. BA rise in the price of X with income and the price of Y unchangedCorrect
  3. CA rise in the price of Y with income and the price of X unchanged
  4. DA fall in the price of Y with income and the price of X unchanged
  5. An equal proportionate rise in both prices and income

Explanation

The vertical intercept is income divided by the price of Y. If only the price of X rises, that intercept is unchanged, while the horizontal intercept (income divided by price of X) falls, so the line pivots inwards. A fall in income shifts the line in parallel, and a change in the price of Y moves the vertical intercept.

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