Chapter 2, Problem 1SCQ

Suppose Alphonso’s town raised the price of bus tickets to $\$\text{1}$ per trip (while file price of burgers stayed at $\$\text{2}$ and his budget remained $\$\text{1}0$ per week.) Draw Alphonso’s new budget constraint. What happens to file opportunity cost of bus tickets?

To determine

The bus tickets in Alphonso ‘s town has increased to $1 per trip whereas the price of burger is constant at $2 and his income is $10 per week. Provide Alphonso’s new budget constraint. Also, comment about the opportunity cost of bus tickets.

Answer to Problem 1SCQ

As the price of bus tickets rises, the opportunity cost of bus tickets falls.

Explanation of Solution

The equation of budget constraint is:

${\text{P}}_{\text{BT}}{\text{×Q}}_{\text{BT}}{\text{+P}}_{\text{B}}{\text{×Q}}_{\text{B}}\text{= I}$

Where,

$\begin{array}{l}{P}_{BT}=\text{}\text{ Price of Bus Ticket}\\ Q_{BT}=\text{Quantity of Bus Ticket}\\ {\text{P}}_B=\text{ Price of Burger}\\ {\text{Q}}_B=\text{ Quantity of Burger}\\ \text{I = Income }\end{array}$

Therefore, the equation of new budget constraint will be as follows:

${\text{\$1×Q}}_{\text{BT}}{\text{+ \$2×Q}}_{\text{B}}\text{= 10}$

The formula for opportunity cost of bus tickets would be:

$\frac{\Delta \text{ Price of Burgers}}{\Delta \text{ Price of Bus tickets}}$

So, as the price of bus tickets rises, the opportunity cost of bus tickets falls.

Economics Concept Introduction

Budget Constraint: It is an equation which shows various combinations of units of good purchased at a particular price with given income.

Opportunity Cost: It is the cost of next best alternative activity.