Question
What is a budget line? Explain why is it a straight line?
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Answer
Budget line is the graphical presentation of the different combinations of good $X$ and good $Y$ which can be purchased with the given money income. $P _{ X } \cdot X + P _{ Y } \cdot Y = M$
Where $M$ is Money income. $P_x$ and $P_y$ are prices of $X$ and $Y$ respectively and $X$ and $Y$ are quantities of good $X$ and good $Y$ respectively. Budget line is a straight line because the market rate of exchange (MRE) between the two goods is constant and also because the price of the two goods are constant.
Where $M$ is Money income. $P_x$ and $P_y$ are prices of $X$ and $Y$ respectively and $X$ and $Y$ are quantities of good $X$ and good $Y$ respectively. Budget line is a straight line because the market rate of exchange (MRE) between the two goods is constant and also because the price of the two goods are constant.
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