If quantity of tea is measured on the horizontal axis and quantity of coffee is measured on the vertical axis, an increase in the price of coffee will cause the budget constraint to: A. pivot rightward (pivot out) along the horizontal axis. B. pivot leftward (pivot in) along the vertical axis. C. pivot leftward (pivot in) along the horizontal axis. D. pivot rightward (pivot out) along the vertical axis.

Question

Alden

Business

17 February, 11:56

If quantity of tea is measured on the horizontal axis and quantity of coffee is measured on the vertical axis, an increase in the price of coffee will cause the budget constraint to: A. pivot rightward (pivot out) along the horizontal axis. B. pivot leftward (pivot in) along the vertical axis. C. pivot leftward (pivot in) along the horizontal axis. D. pivot rightward (pivot out) along the vertical axis.

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Answers (1)

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Darrell Cochran · Answer 1

A. pivot rightward (pivot out) along the horizontal axis

Explanation:

Tea and coffee represent substitute goods. If price of a good increases, this causes an increase in quantity demanded of it's substitute.

In the given case, quantity demanded of tea is measured on horizontal axis while quantity demanded of coffee is measured on vertical axis. The budget constraint for tea and coffee shows different combinations of quantity of tea and coffee demanded within a fixed expenditure.

When price of coffee increases, within the same budget constraint, the quantity demanded of tea shall rise.

This would lead to the budget constraint to pivot rightward (pivot out) along the horizontal axis.