Question

Suppose you own an outdoor recreation company and you want to purchase all-terrain vehicles (ATVs) for your summer business and snowmobiles for your winter business. Your budget for new vehicles this year is $240,000. ATVs cost $8000 each and snowmobiles cost $12,000 each.

a. Draw a budget line for your purchase of new vehicles.

b. What is the opportunity cost of one ATV?

c. What is the opportunity cost of one snowmobile?

Answer 1

a. Budget line is represented on the graph:

b. Opportunity cost of one ATV is $8 000/12 000 = 2/3$ snowmobiles, as money we spend to buy 1 ATV can be alternatively used to buy 2/3 of snowmobile.

c. Analogously, opportunity cost of one snowmobile is $12 000/ 8 000=1.5$ ATW