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Suppose Greg can spend his income on only two products: X and Y
Suppose Greg can spend his income on only two products: X and Y . Price of good X is $6 per unit; price of Y is $9 per unit; and Greg earns $72 a day. In addition, a tax of $2 per unit of X purchased is imposed on any buyer. If you draw Greg's budget line with quantity of X on the x-axis and quantity of Y on the y-axis then x and y intercepts of the budget line will be: 1) 9 and 8 respectively. 2) 9 and 9 respectively. 3) 8 and 6 respectively. 4) 10 and 10 respectively.
Expert Solution
Budget line equation: Income = Px. X + Py. Y
where Px = Price of X and X is the Quantity of X
Py = Price of Y and Y is the Quantity of Y
When price of X = 8 (including tax amount), Greg can buy 9 units of X at the maximum considering he buys 0 units of Y.
As per budget equation formula,
72 = 8*9 + 9*0
Similarly when the price of Y =9, Greg can buy 8 units of Y at maximum when he doesn't not buy any amount of X.
72 = 8*0 + 9*8
Thus when the X axis and Y axis represent Quantity purchased of X and Y respectively, the X and Y intercepts on the budget line will be 9 and 8 respectively. The answer is Option 1.
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