The shift of the budget line from cd to ab in the figure is consistent with which of the following?

• A. A decrease in consumer income, with prices of both goods unchanged
• B. An increase in the price of both goods, with income unchanged
• C. An increase in consumer income, with prices of both goods unchanged
• D. A decrease in the price of one good, with income and the other price unchanged

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the budget line equation, which is given by \(P_x X + P_y Y = I\), where \(P_x\) and \(P_y\) are the prices of goods X and Y, respectively, and \(I\) is the consumer's income.
2. Step 2: Recognize that a shift of the budget line outward (from cd to ab) means the consumer can afford more of both goods, which implies an increase in the consumer's purchasing power.
3. Step 3: Analyze the effects of each option on the budget line: - A decrease in income shifts the budget line inward. - An increase in prices shifts the budget line inward. - An increase in income shifts the budget line outward, parallel to the original line. - A decrease in the price of one good pivots the budget line, changing its slope.
4. Step 4: Since the shift from cd to ab is parallel and outward, it indicates an increase in income with prices unchanged, because only income changes the intercepts proportionally without changing the slope.
5. Step 5: Conclude that the correct interpretation of the budget line shift is an increase in consumer income, with prices of both goods unchanged.