Answer to Question #166508 in Macroeconomics for adele

Question

1.   Suppose Alphonso’s town raises the price of bus tickets from $0.50 to $1 and the price of burgers rises from $2 to $4. Why is the opportunity cost of bus tickets unchanged? Suppose Alphonso’s weekly spending money increases from $10 to $20. How is his budget constraint affected from all three changes? Explain.

Answer 1

Solution:

The opportunity cost is derived from the ratio of the prices of the two goods. Because the price of both goods doubled, the ratio will stay the same and therefore, Alphonso opportunity cost will remain ¼ of a burger to buy one bus ticket.

When Alphonso’s weekly spending increases to $20, which means his income has doubled, therefore, his budget constraint will remain unchanged since in both cases he can still select 5 burgers, 20 bus tickets, or any combination in between.