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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

Suppose Alphonso’s town raised the price of bus tickets to Chapter 2, Problem 1SCQ, Suppose Alphonso’s town raised the price of bus tickets to per trip (while file price of burgers , example  1 per trip (while file price of burgers stayed at Chapter 2, Problem 1SCQ, Suppose Alphonso’s town raised the price of bus tickets to per trip (while file price of burgers , example  2 and his budget remained Chapter 2, Problem 1SCQ, Suppose Alphonso’s town raised the price of bus tickets to per trip (while file price of burgers , example  3 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

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

Explanation

The equation of budget constraint is:

PBT×QBT+PB×QB= I

Where,

PBT= Price of Bus TicketQBT=Quantity of Bus TicketPB= Price of BurgerQB= Quantity of BurgerI = Income 

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

$1×QBT+ $2×QB= 10

The formula for opportunity cost of bus tickets would be:

Δ Price of BurgersΔ Price of Bus tickets

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

Concept

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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