Concept explainers
Suppose Alphonso’s town raised the
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:
Where,
Therefore, the equation of new budget constraint will be as follows:
The formula for opportunity cost of bus tickets would be:
So, as the price of bus tickets rises, the opportunity cost of bus tickets falls.
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.
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