Question

In the equation of the budget line \( p_1x_1 + p_2x_2 = M \), what are \( p_1, p_2 \)?

• A. Prices of good 1 and good 2
• B. Quantities of good 1 and good 2
• C. Income of consumer
• D. None of these

Hint:

The budget line equation shows how a consumer’s income is allocated between two goods, based on their prices and quantities.

Answer 1

The Correct Option is A

Step 1: Understanding the budget line equation.
The budget line equation \( p_1x_1 + p_2x_2 = M \) represents the relationship between the prices of two goods (\( p_1 \) and \( p_2 \)) and the consumer’s income (M). Here, \( x_1 \) and \( x_2 \) are the quantities of goods 1 and 2 that the consumer can purchase. The equation shows how the consumer’s income is divided between the two goods.

Step 2: Analyzing the options.
(A) Prices of good 1 and good 2: Correct. In the equation, \( p_1 \) and \( p_2 \) represent the prices of the two goods.
(B) Quantities of good 1 and good 2: The quantities are represented by \( x_1 \) and \( x_2 \), not \( p_1 \) and \( p_2 \).
(C) Income of consumer: The income is represented by \( M \), not \( p_1 \) and \( p_2 \).
(D) None of these: This is incorrect because the correct answer is (A).

Step 3: Conclusion.
In the budget line equation, \( p_1 \) and \( p_2 \) represent the prices of goods 1 and 2. Therefore, the correct answer is (A) Prices of good 1 and good 2.