Hi guys, I have a question:
A consumer’s budget constraint is drawn with Good X on the horizontal axis and Good Y on the vertical. If price of Good X is 8 and price of good Y is 20, what is the value of the slope of the consumer’s budget constraint?
Why is the answer -Px/Py and not -Py/Px? Could someone help me ? Thanks
Px and Py are the prices of X and Y, but the graph represents how much of X and Y can be bought, which is kind of the inverse of price (1/ Px) (1/Py). Not exactly, but it’s a way to think about it…
E.g. if B is your budget, at the y-axis crossover, you can buy B/Py of Y. The point is (0 , B/Py)
At the x-axis crossover, you can buy B/Px of X. The point is (B/Px , 0)
remember from school: (y2-y1) / (x2-x1)
So: ( 0 - B/Py) / (B/Px - 0)
= -(1/Py) / (1/Px)
= - Px / Py