In the graph, the consumer's income rises and prices stay the same. The new optimum will most likely be A budget line from 10 units of good 2 to 20 units of good 1, and three indifference curves IC₁, IC₂, IC₃, each convex to the origin and higher than the last. IC₂ just touches the budget line at E (10 units of good 1, 5 of good 2). IC₁ cuts the budget line twice; IC₃ lies entirely beyond it.

In the graph, the consumer's income rises…

In the graph, the consumer's income rises and prices stay the same.

Question 66

HardOriginal question

In the graph, the consumer's income rises and prices stay the same. The new optimum will most likely be

A budget line from 10 units of good 2 to 20 units of good 1, and three indifference curves IC₁, IC₂, IC₃, each convex to the origin and higher than the last. IC₂ just touches the budget line at E (10 units of good 1, 5 of good 2). IC₁ cuts the budget line twice; IC₃ lies entirely beyond it.

still at ECorrect answerYour answeron a higher indifference curve, where a new, parallel budget line touches oneCorrect answerYour answeron IC₁Correct answerYour answerat the good-2 interceptCorrect answerYour answer

Show the answer and explanation

CorrectNot quiteAnswer B

Correct answer: B

Higher income shifts the budget line out in parallel.
The consumer can now reach a higher indifference curve; the new optimum is where the new line touches the highest one it reaches.

Concept: Income rise and the optimum
Typical timeTypical: 100 s
Your timeYours: —

The rule this testsThe consumer's optimal choice

Practise this chapter →

Ten questions from Budget Line & Optimal Choice, at your own pace.

Practise this chapter →

Ten questions from Budget Line & Optimal Choice, at your own pace.

In the graph, the consumer's income rises and prices stay the same.

Question 66

Explanation