The difference between a price increase and a decrease in income is that:
A) a decrease in income does not affect the slope of the budget line, while an increase in price does change the slope.
B) a price increase does not affect the consumption of other goods, while a decrease in income does.
C) a price increase will increase real income, while a decrease in income will increase real income.
D) None of the statements is correct.

Question

Quizplus · Accepted Answer

A price increase will change the slope of the budget line, while a decrease in income will not. This is because the budget line represents all possible combinations of two goods that a consumer can purchase given their income and the prices of the goods. An increase in price will directly affect the slope of the budget line because it changes the price ratio between the two goods. In contrast, a decrease in income will simply shift the budget line inward, but not change its slope.

The Difference Between a Price Increase and a Decrease in Income