What is the significance of the slope on a two-product budget line? What effect does a change in income have on the slope? A change in product price?
Please provide the best answer for the statement.
The budget line represents the ratio of the price of product B to that of product A. In other words, it is how much of product A a consumer must forgo to receive a certain amount of product B. Suppose products A and B cost $2.00 and $4.00, respectively. The absolute value of their slope would thus be 2, meaning that the consumer must forgo 2 units of product A to receive one unit of product B.
A change in income has no effect on the slope, as the relative prices have not changed. The only feature that changes on the budget line is the intercepts.
A change in product price, however, will change the slope, assuming the ratio of relative prices changes. For example, should $2.00 product A increase in price to $3.00, the slope would change to 4/3, meaning that the consumer must now give up 3 units of product A to receive 4 units of product B.
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