Chapter 9, Problem 1SPA

To determine

Real income, relative prices, and opportunity cost.

Explanation of Solution

The given income of S is $12, the price of popcorn is $3 per bag, and the price of a smoothie is $3.

The real income can be obtained using Equation (1) as follows:

$\text{Real income}=\frac{\text{Nominal income}}{\text{Price of a good}}$ (1)

The real income in terms of smoothies can be obtained by substituting the respective values in Equation (1) as follows:

$\begin{array}{c}\text{Real income}=\frac{\text{12}}{\text{3}}\\ =4\end{array}$

The real income in terms of smoothies is 4.

The real income in terms of popcorns can be obtained by substituting the respective values in Equation (1).

$\begin{array}{c}\text{Real income}=\frac{\text{12}}{\text{3}}\\ =4\end{array}$

The real income in terms of popcorns is 4 bags.

The relative price of smoothies in terms of popcorns can be calculated as the ratio of their nominal prices using the following equation:

$\begin{array}{c}{\text{Relative price}}_{\text{Smoothies/popcorn}}=\frac{{\text{Price}}_{\text{Smoothies}}}{{\text{Price}}_{\text{Popcorn}}}\\ =\frac{3}{3}\\ =1\end{array}$

The relative price of smoothies in terms of popcorns is 1.

The opportunity cost of a smoothie can be calculated using the following equation:

$\begin{array}{c}{\text{Opportunity cost}}_{\text{Smoothies/popcorn}}=\frac{{\text{Price}}_{\text{Smoothies}}}{{\text{Price}}_{\text{Popcorn}}}\\ =\frac{3}{3}\\ =1\end{array}$

Thus, the opportunity cost of buying one smoothie is the cost foregone to buy one bag of popcorn.

Economics Concept Introduction

Opportunity cost: The opportunity cost refers to the benefits given up in the process of obtaining some other benefits.