Today's Question
A budget constraint shows all affordable combinations of goods given your income. If you earn $100 and pizza costs $10 while sushi costs $20, you could buy 10 pizzas and 0 sushi, OR 0 pizzas and 5 sushi, OR combinations in between. If the price of pizza suddenly drops to $5, how does your budget constraint change? Are you better off or worse off?
Model Answer
Your budget constraint EXPANDS outward - you can now afford more combinations! With pizza at $5, you could buy 20 pizzas OR 5 sushi OR many more combinations than before. You're definitely better off because every option you had before is still available, PLUS new options. Even if you don't eat pizza, cheaper pizza frees up money for more sushi. Price drops expand choices.