Question

Suppose you only consume food and clothing, and clothing is plotted on the vertical axis. Also, you purchase food at a fixed price (P F), but the price of clothing declines as you buy in larger quantities (i.e., quantity discounts). What does the budget line look like in this case?

Answer 1

Answer:

The correct answer is: The budget line is now convex to (bows in toward) the origin.

Explanation:

Indifference curves are a set of combinations of goods that provide the same utility to the consumer. On a curve of indifference the consumer is indifferent between any of the baskets of goods presented to him.

A curve is convex to the origin when the line connecting two points of the curve passes over the indifference curve. This assumption cannot be demonstrated from the assumptions of preferences, but is based on the principle of diversity in consumption.