SUBMITTED BY: Taha Amir.

Subject: 70124603.

Reg No: Principal of Microeconomics.

Department: BS Economics.

SEMESTER: 4th (Fourth).

TOPIC: Budget line & indifference Curve.

DATE: 01-06-2023.
Question # 1:
Sara is a college student with a limited budget. She spends her income on two goods, X and Y. The
price of good X is $5 per unit, and the price of good Y is $10 per unit. Sara’s monthly income is
$200. Draw the budget line and indifference curve for Sara’s consumption choices. Explain how
changes in prices and income would affect her budget line and indifference curve.
Please provide a comprehensive answer, considering the concepts of budget constraint, optimal
consumption, and the relationship between indifference curves and budget lines.
To draw Sara's budget line, we need to consider the prices of goods X and Y and her monthly
income. The price of good X is $5 per unit, and the price of good Y is $10 per unit. Sara's monthly
income is $200.
Explanation:
Let's assume Sara spends all her income on goods X and Y. In this case, she can buy a
maximum quantity of good X by dividing her income by the price of X:
Quantity of X = Income / Price of X
Quantity of X = $200 / $5
Quantity of X = 40 units
Similarly, she can buy a maximum quantity of good Y by dividing her income by the price of Y:
Quantity of Y = Income / Price of Y
Quantity of Y = $200 / $10
Quantity of Y = 20 units
Now we can plot Sara's budget line on a graph. The budget line represents all the combinations of
goods X and Y that Sara can afford with her given income and prices. Let's assume the quantity of
X is represented on the x-axis and the quantity of Y on the y-axis.
The coordinates of the budget line are as follows:
Point A: (40, 0) - Maximum quantity of X and zero quantity of Y
Point B: (0, 20) - Zero quantity of X and maximum quantity of Y
Now, let's consider indifference curves. Indifference curves represent different levels of satisfaction
or utility for Sara. Each curve represents a different combination of goods X and Y that provides
Sara with the same level of satisfaction.
If we assume that Sara's preferences are typical, the indifference curves will have a downward
slope, indicating that Sara is willing to substitute one good for another at a diminishing rate. This
means that she prefers a mix of goods X and Y rather than only consuming one good.
Now, let's discuss how changes in prices and income would affect Sara's budget line and
indifference curves:
Changes in prices:
• If the price of good X decreases, the budget line will rotate outward from the y-axis. Sara
will be able to purchase more of both goods X and Y.
• If the price of good Y decreases, the budget line will rotate outward from the x-axis. Sara
 will be able to purchase more of both goods X and Y.
• If the price of either good X or Y increases, the budget line will rotate inward toward the
opposite axis. Sara will have to reduce her consumption of the more expensive good.
Changes in income:
• If Sara's income increases, her budget line will shift outward parallel to the original budget
line. She will be able to afford larger quantities of both goods X and Y.
• If Sara's income decreases, her budget line will shift inward parallel to the original budget
line. She will have to reduce her consumption of both goods X and Y.
• As for the indifference curves, changes in prices and income do not directly affect their
shape. However, changes in prices will change the relative prices of goods X and Y and,
therefore, alter the optimal combination of goods on each indifference curve. Changes in
income will shift the indifference curves outward or inward depending on whether income
increases or decreases, respectively.

Table:
No. of Pizza No. of Pepsi Spending on Spending of Total Spending
Pizza Pepsi

10 0 200 0 200

9 2 180 20 200

8 4 160 40 200

7 6 140 60 200

6 8 120 80 200

5 10 100 100 200

4 12 80 120 200

3 14 60 140 200

2 16 40 160 200

1 18 20 180 200

0 20 0 200 200
Consumer Budget Constraint:
Y

20

18

16

14

12

10

0
X
1 2 3 4 5 6 7 8 9 10

Indifference Curve:
Y
20

18

16

14

12

10

0
X
1 2 3 4 5 6 7 8 9 10