Answer to Question #240766 in Microeconomics for Marley

Question

Suppose M = 8, P1 = 4, P2 = 2. Graph the budget set for this consumer.

b) Define the opportunity cost of good 1 in terms of good 2.

c) Determine the opportunity cost of good 1 at the point where 21 = 1.

d) Does the opportunity cost of 1 change as we move along the budget line? Explain.

e) Now suppose that M = 16, P1 = 2, P2 = 4. Graph the consumer's budget set in this case

f) Can we rank these budget sets in terms of which is better for the consumer? Explain.

Answer 1

a)

Given m=8,p₁=4 and P₂=2

Budget will be $8=4x_1+2x_2$

If x₁=0 $X_2=\frac{8}{2}=4$

If x₂=0 $X_1=\frac{8}{4}=2$

b)

Opportunity cost of good 1

$=\frac{\Delta consumption \space of\space good \space 2}{\Delta consumption \space of\space good \space 1}=\frac{4}{2}=2$

c)

Opportunity cost of good 1 when x₁=0

$\frac{4-2}{1}=2$

d)

Opportunity cost does not change as we move along the budget line as the budget line is a straight line.

e)

Given m=16,p₁=2 and P₂=4

Budget will be $16=2x_1+4x_2$

If x₁=0 $X_2=\frac{16}{4}=4$

If x₂=0 $X_1=\frac{16}{2}=8$

f)

In budget 16=2x₁+4x₂ consumer can consume more quantity of good 1 and 2 compared to budget 8=4x₁+2x₂