Answer to Question #285475 in Microeconomics for keeks

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 $480,000. ATVs cost $12000 each and snowmobiles cost $16,000 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

Solution:

a.). The budget line is as follows:

I = PxX + PyY

480,000 = 12000X + 16000Y

 

The budget line is as below:

 

b.). The opportunity cost of one ATV = Cost of the ATV $\div$ Cost of snowmobile = 12,000 $\div$ 16,000 = 0.75

 

c.). The opportunity cost of one snowmobile = Cost of the snowmobile $\div$ Cost of the ATV = 16,000 $\div$ 12,000 = 1.33