Answer to Question #207604 in Microeconomics for Dalitso

Question

Malita has K150 of disposable income to spend each week and cannot borrow money. She buys Milk balls and a composite good. Suppose that Milk balls cost K2.50 per bag and the composite good costs K1 per unit.Sketch Malita’s budget constraint.What is the opportunity cost, in terms of bags of Milk balls, of an additional unit of the composite good?Suppose that in an inflationary period the cost of the composite good increases to K1.50 per unit, but the cost of Milk balls remains the same. Sketch the new budget constraint.What is the opportunity cost of van additional unit of the composite good?Suppose now Malita demands a pay raise to figjht the inflation. Her boss submits and raises her salary so that her disposable income is now K225 per week. Sketch the new budget constraint. Is Malita better off?What is the opportunity cost of an additional unit of the composite good?

Answer 1

$Y = K150$

Pm = K2.5 and Pc = K1

where $P_m$ is price of milk balls and $P_c$ is price of composite good

Assuming Qm is quantity of milk balls and Qc is quantity of composite good

Budget line = $Q_m × P_m + Q_c × P_c$

$150 = Q_m × 2.5 + Q_c × 1$

$150 = 2.5 Q_m + Q_c$

Putting $Q_c=0$ to calculate $Q_m$

$150 = 2.5Q_m + 0$

$Q_m = 60$

Now putting $Q_m = 0$ to calculate $Q_c$

$150 = 0 + Q_c$

$Q_c = 150$

Malita persuaded her boss to increase her pay, so now her income is K225 but prices are same.

New budget line will be ;$225 = Q_m ×P_m + Qc ×P_c$

$225 = Q_m × 2.5 + Q_c × 1$

Now she can buy $Q_m = 90$ and $Q_c = 225$

Yes, Malita is better off as now she can buy 90 bags of milk balls as compared to 60 bags and buy 225 units of composite as compared to 150 units previously assuming she can spent the entire income on one good.

Opportunity cost of an additional unit of composite good will be 1.5. As Malita has to give up a milk bag amounting to K2.5 to buy a composite good of K1.

Price of alternative not chosen = 2.5

Price of alternative chosen = 1

Opportunity cost = Price of alternative not chosen $-$ Price of alternative chosen

Thus, opportunity cost = $2.5 - 1 = 1.5$