Answer to Question #158919 in Microeconomics for Jack

Question

1. Suppose a consumer has the following possible combinations of consumption:

Goods A B C D E F G

DVD (Y-axis) 0 2 4 6 8 10 12

(in thousands)

burger (X-axis) 6 5 4 3 2 1 0

(in thousands)

(a) Define opportunity cost.                              

(b) Use the data above to plot the budget line. What is the value of the slope of the

   budget line?                                        

(c) What is the opportunity cost of one more unit of DVD? Of one more unit of burger?

                                                          

(d) Does the budget line indicate an increasing opportunity cost? Justify your answer.

                                                            

(e) Explain how a decrease in the price of DVD affect the above budget line? What

   happen to the budget line if the consumer income is doubled. Explain your answer.   

                                                            

(f) If the shape of the above budget line is con concave, explain how it will affect the 

   interpretation of the opportunity cost.    

Answer 1

(a) Opportunity cost is the forgone benefit that would have been derived by an option not chosen. 

(b) The budget line connects points A(6;0) and G(0;12). The value of the slope of the budget line is (12 - 0)/(0 - 6) = -2.

(c) The opportunity cost of one more unit of DVD is 0.5 burger. The opportunity cost of one more unit of burger is 2 DVD.

(d) The budget line does not indicate an increasing opportunity cost, because it is a straight line.

(e) A decrease in the price of DVD will make the budget line steeper. The budget line will shift to the right if the consumer income is doubled.

(f) If the shape of the above budget line is con concave, then the opportunity cost will be decreasing.