The theory thus proceeds by supposing that Hugh is presented with
market prices that he cannot change and then by analyzing how he
adjusts to these prices by choosing a bundle of goods such that, at the
margin, his own subjective valuation of the goods coincides with the
valuations given by market prices.
We will now use this theory to predict the typical consumer’s response to
a change in income and in prices.
The Consumer’s Response to a Change in
Income
A change in Hugh’s money income will, ceteris paribus, shift his budget
line. For example, if Hugh’s income doubles, he will be able to buy twice
as much of both food and clothing compared with any combination on his
previous budget line. His budget line will therefore shift out parallel to
itself to indicate this expansion in his consumption possibilities. (The fact
that it will be a parallel shift is established by the previous demonstration
that the slope of the budget line depends only on the relative prices of the
two products.)
For each level of Hugh’s income, there will be a utility-maximizing point
at which an indifference curve is tangent to the relevant budget line. Each
such utility-maximizing position means that Hugh is doing as well as
possible at that level of income. If we move the budget line through all
possible levels of income, and if we join up all the utility-maximizing
points, we will trace out what is called an income-consumption line, an