Which of the following best describes a budget line in microeconomics?

• A. It shows all combinations of two goods that a consumer can purchase given their income and the prices of the goods.
• B. It shows the relationship between price and quantity supplied for a single good.
• C. It illustrates the total market demand for a good at different prices.
• D. It represents the maximum utility a consumer can achieve.

Answer: (A)

Verified step by step guidance

1. Understand that a budget line represents the combinations of two goods that a consumer can afford given their income and the prices of those goods.
2. Recall the formula for the budget line: \(\text{Income} = P_1 \times Q_1 + P_2 \times Q_2\), where \(P_1\) and \(P_2\) are the prices of goods 1 and 2, and \(Q_1\) and \(Q_2\) are the quantities of those goods.
3. Recognize that the budget line is a graphical representation of all points \((Q_1, Q_2)\) that satisfy the budget constraint equation above.
4. Note that the slope of the budget line is given by \(-\frac{P_1}{P_2}\), which shows the rate at which one good can be traded for the other while staying within the budget.
5. Distinguish the budget line from other concepts: it is not about supply or demand curves, nor does it directly represent utility, but rather the feasible consumption choices given income and prices.