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How is the budget constraint line determined?

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How is a budget constraint determined, and why does it looks as it does in a graph?

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Solution Summary

Explains how the budget constraint is determined and why it looks as it does in a graph.

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The budget constraint for two products is

Income = Px * Qx + Py * Qy

Basically what it says is that one can only spend, in goods x and y as much as we have in come. Px * Qx = the amount of good X that is purchased times the price, which is the amount we are spending on good x. The same is true for Py * Qy. So that income has to be equal to what ...

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