Consumer Behavior

Step 1: Understanding the budget line.
The budget line shows the combinations of two goods that a consumer can afford given their income and the prices of the goods. The slope of the budget line is given by the ratio of the prices of the goods, which is , where is the price of the first good and is the price of the second good.

Step 2: Conclusion.
Thus, the correct answer is option (1) .

Step 1: Understanding Substitute Goods.
Substitute goods are those goods that can replace each other in consumption. When the price of one good rises, the demand for its substitute increases. For example, tea and coffee are substitutes; when the price of tea increases, the demand for coffee may rise.

Step 2: Understanding Complementary Goods.
Complementary goods are those goods that are used together. An increase in the price of one good leads to a decrease in the demand for its complement. For example, cars and fuel are complementary goods; if the price of cars rises, the demand for fuel may decrease.

Step 3: Conclusion.
Substitute goods fulfill the same need, whereas complementary goods are used together to satisfy a demand.

Step 1: Understanding perfectly elastic demand.
Perfectly elastic demand refers to a situation where the quantity demanded of a good or service changes infinitely in response to even the slightest change in price. The demand curve is horizontal, indicating that any increase in price will lead to zero quantity demanded.

Step 2: Understanding perfectly inelastic demand.
Perfectly inelastic demand refers to a situation where the quantity demanded does not change at all regardless of changes in price. The demand curve is vertical, meaning that consumers will buy the same quantity regardless of price changes.

Step 3: Conclusion.
Thus, perfectly elastic demand shows infinite sensitivity to price, while perfectly inelastic demand is completely insensitive to price.