Why budget line is a straight line
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Therefore, the points on the former curve are strictly preferred to the points on the latter curve. The budget line can be written algebraically as follows: Where P x and P y denote prices of goods X and Y respectively and M stands for money income: The above budget-line equation 1 implies that, given the money income of the consumer and prices of the two goods, every combination lying on the budget line will cost the same amount of money and can therefore be purchased with the given income. The budget line is downward sloping because, in order to increase the consumption of one good, the consumption of the other good must be reduced, with constant M. This price ratio represents the relative price of good X in terms of the quantities of good Y. In financial modeling, a depreciation schedule is requried to link the three financial statements in Excel amount. The preference-indifference pattern of the consumer based on the axioms of preferences. Slanted or oblique straight lines are just as they sound: they are straight lines at an angle.

This is effectively a map of future expenditures, with all the constituent expenditures individually noted and quantified. The calculation of straight-line rent may result in a monthly rent expense that differs from the actual amount billed by the. Lines, on the other hand, extend out to infinity. The possible options of spending income of Rs. The budget line is a negatively downward sloping line. A straight budge line depicts the constant slope of the budget line.

An asset is a resource controlled by a company which future economic benefit. It means, to gain 1 apple, consumer will have to reduce his expenditure on bananas by Rs. Taken informally, the budget line describes the boundary of affordability for a given budget and specific goods. Important Points about Budget line Refer Fig. Although it is strange to think that a straight line would make an angle, remember that a straight line makes a 180 degree angle when you draw an angle arc from one point of a straight line to another point of that straight line. Although point d was a more desirable position than points a or b, it was unattainable given technology and resources.

A straight line is essentially just a line with no curves. Therefore, points between the budget constraint and the origin are points where the consumer is not spending all of her income i. Spending money on a product means that money cannot be used to purchase another product. It may be noted that equation 6. Most of the time, when we speak about lines, we are talking about straight lines! Here, in the market, price of one unit of good X is 2 units of good Y. More Straight Lines There are other kinds of straight lines that are helpful to learn.

The need to produce guns reduced the production of butter. A budget constraint is a straight line because: A the tastes and preferences of the consumer change along the constraint. Over the useful life of an asset, the value of an asset should depreciate to its salvage value. Question 2 If the government taxes producers that create pollution, the government's policy A allows the producers to pollute more by increasing their costs. It extends to infinity in one direction and has an endpoint at the other end. Warning: this topic has not been posted in for at least 120 days. C the opportunity cost of buying each of the goods changes along the constraint.

Useful life of a fixed asset represents the number of accounting periods within which the asset is expected to generate economic benefits. In the case of books versus movies, the tradeoff is a straight line because one more book always costs two movies, regardless of how many books Rose has already. In such a case, the straight-line amount charged to expense is higher than the actual amount billed during the first few months of the lease, and lower than the amount billed during the final months of the lease. The budget constraint concept is most easily explained via an example. Here are some examples of straight lines. Depreciation expense is used to better match the expense of a long-term asset to the revenue it generates.

You can also graph the other extreme -- all crime novels and no movies. We intend to prove that this slope is equal to the ratio of the prices of goods X and Y. These three core statements are intricately linked to each other and this guide will explain how they all fit together. The amount spent on a beer can be written as 2B, where B is the number of beers consumed. This manner of naming a line is usually used when the line does not have any known points on it to reference. But in his pursuit of buying more and more goods and thus obtaining more and more satisfaction he has to work under two constraints: first, he has to pay the prices for the goods and, secondly, he has a limited money income with which to purchase the goods. The slope of the budget line is , which implies the rate of exchange or the rate at which good 2 can be substituted for good 1.

Parallel straight lines have the same slope and are the same distance apart, so they will never intersect. Changes in Price and Shift in Budget Line: Now, what happens to the budget line if either the prices of goods change or the income changes. Lesson Summary To review, a line is characterized as a straight, thin, one-dimensional, zero width object that extends on both sides to infinity. Depreciation Carrying Value Purchase — 20,000 Year ended 2011-06-30 1,875 18,125 Year ended 2012-06-30 3,750 14,375 Year ended 2013-06-30 3,750 10,625 Year ended 2014-06-30 3,750 6,875 Year ended 2015-06-30 1,875 5,000 Please note that the carrying amount of the asset will never fall below the salvage value because this is the amount which can be recovered even when the asset is no longer being used. Usually this letter is indicated in lower case.