(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 109

84 PART 2 • Producers, Consumers, and Competitive Markets
Using equation (3.1), we can see how much of C must be given up to consume
more of F. We divide both sides of the equation by PC and then solve for C:
C = (I/PC) - (PF/PC)F

(3.2)

Equation (3.2) is the equation for a straight line; it has a vertical intercept of
I/PC and a slope of −(PF/PC ).
The slope of the budget line, −(PF/PC ), is the negative of the ratio of the prices of
the two goods. The magnitude of the slope tells us the rate at which the two goods
can be substituted for each other without changing the total amount of money
spent. The vertical intercept (I/PC ) represents the maximum amount of C that
can be purchased with income I. Finally, the horizontal intercept (I/PF ) tells us
how many units of F can be purchased if all income were spent on F.

The Effects of Changes in Income and Prices
We have seen that the budget line depends both on income and on the prices
of the goods, PF and PC. But of course prices and income often change. Let’s see
how such changes affect the budget line.
INCOME CHANGES What happens to the budget line when income changes?
From the equation for the straight line (3.2), we can see that a change in income
alters the vertical intercept of the budget line but does not change the slope
(because the price of neither good changed). Figure 3.11 shows that if income is
doubled (from $80 to $160), the budget line shifts outward, from budget line L1
to budget line L2. Note, however, that L2 remains parallel to L1. If she desires, our
consumer can now double her purchases of both food and clothing. Likewise,
if her income is cut in half (from $80 to $40), the budget line shifts inward, from
L1 to L3.

Clothing

(units per week)
80

F IGURE 3.11

60

EFFECTS OF A CHANGE IN INCOME
ON THE BUDGET LINE
A change in income (with prices unchanged)
causes the budget line to shift parallel to
the original line (L1). When the income of
$80 (on L1) is increased to $160, the budget
line shifts outward to L2. If the income falls
to $40, the line shifts inward to L3.

40

20

L1

L3

L2

(I = $40)

(I = $80)

40

80

(I = $160)

120

Food
160
(units per week)