Question

Marge buys pizza for \(10 and Pepsi for \)2. She has income of \(200. Her budget constraint will experience a parallel outward shift if.

a. the price of pizza falls to \)5, the price of Pepsi falls to \(1 and her income falls to 100.

b. the price of pizza rises to \)20, the price of Pepsi rises to \(4 and her income remains the same.

c. the price of pizza falls to \)8, the price of Pepsi falls to \(1 and her income rises to \)240.

d. the price of pizza rises to 20, the price of Pepsi rises to \(4 and her income rises to \)500.

Short answer

The correct answer is option d) the price of pizza rises to 20, the price of Pepsi rises to $4, and her income rises to $500.

Step-by-step solution

Explanation for the correct answer

When the income increases to a considerably high level and the rise in the price of other commodities don’t rise that much, it won’t much affect the individual's budget constraint. In the present scenario, the income has increased more than double, and the price of commodities hasn’t increased that much.

The price of the pizza has only risen nearly 50% and Pepsi by $2. But the income has increased more than double. So it will result in a parallel outward shift in budget constraint.

Explanation for incorrect options

• In option a, there is a fall in both the income and price of commodities. So a parallel outward shift won’t occur in this case. The budget constraint will shift inside.

• In option b, there is only a rise in the price of commodities, and income remains the same. So there is a chance of inward shift.

• In option c, there is a fall in the price of commodities and a rise in income. But the rise in income is only minimal. So there will be an outward shift, but only to a minimum extend, but that would not be a parallel shift.