Question

Homer buys pizza for \(10 and Pepsi for \)2. He has income of \(100. His budget constraint will shift inward if.

a. the price of pizza rises to \)12.

b. the price of Pepsi falls to \(1

c. his income rises to \)150

d. the price of pizza, the price of Pepsi and his income all rise by 50 percent.

Short answer

The correct answer is option (a) the price of pizza rises to $12.

Step-by-step solution

Explanation for the correct option (a)

The budget constraint refers to the possible combination of goods and services that an individual can consume according to his income. When the price of pizza increases to $12, it decreases the purchasing power of the consumer.

When the price of one quantity increases, the consumer can only consume that much less, and it results in the budget constraint shifting inwards.

Explanation of incorrect option

When the price of Pepsi falls, it l allows individuals to consume more units of that product within the budget. So, as a result, the budget constraint will shift outwards.

The budget of the consumer will increase, and the budget line will shift outwards if his income increases to $150. So, option c is also incorrect.

When the price of commodities a well as the income rises by 50%, the budget constraint remains the same. So, the option d is also incorrect.