Question : An increase in the price of a good will lead to:
Option 1: A leftward shift of the budget line
Option 2: A rightward shift of the budget line
Option 3: No change in the budget line
Option 4: Changes in consumer preferences
Correct Answer: A leftward shift of the budget line
Solution : The correct answer is (a) A leftward shift of the budget line.
When the price of a good increases, it reduces the purchasing power of the consumer's income for that particular good. As a result, the consumer can afford to purchase a lesser quantity of the good at the given income level. This change in affordability is reflected in the budget line.
The budget line represents the different combinations of goods that a consumer can afford given their income and the prices of the goods. When the price of a good increases, the consumer's ability to purchase that good decreases. This leads to a leftward shift of the budget line, indicating that the consumer can now afford fewer quantities of the good at the same income level.
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