Answer to Question #67840 in Microeconomics for Kachina

Question

suppose you won $15 on a lotto ticket at the local 7-eleven and decided to spend all the winnings on candy bars and bags of peanuts. Candy bars cost $0.75 each while bags of peanuts cost $1.50 each.
A. Construct a table showing the alternative combinations of the two products that are available.
B. Plot the data in your table as a budget line? What is the opportunity cost of one more candy bar? Of one more bag of peanuts? Do these opportunity costs, rise, fall or remain constant as additional units are purchased?
C. Does the budget line tell you which of the available combinations of candy bars and bags of peanuts to buy?
D. Suppose that you had won $30 on your ticket, not $15. Show the $30 budget line in your diagram. Has the number of available combinations increased or decreased?

Answer 1

I = $15, Pc = $0.75 each, Pp = $1.50 each.
A. The alternative combinations of the two products available are (0 candy bars; 10 bags of peanuts), (2; 9), (4; 8), (6;7), (8; 6), (10; 5), (12; 4), (14; 3), (16; 2), (18; 1) and (20; 0).
B. The opportunity cost of one more candy bar is 0.5 bag of peanut. The opportunity cost of one more bag of peanuts is 2 candy bars. These opportunity costs remain constant as additional units are purchased.
C. No, the budget line just tells you what combinations of candy bars and bags of peanuts are available to buy.
D. If you win $30 on your ticket, then the number of available combinations increases, because now you can buy more of each product.