Question

Suppose Alphonso’s town raises the price of bus tickets from $0.50 to $1 and the price of burgers rises from $2 to $4. Why is the opportunity cost of bus tickets unchanged? Suppose Alphonso’s weekly spending money increases from $10 to $20. How is his budget constraint affected from all three changes? Explain. Include rough graphs.

Answer 1

The opportunity cost of bus tickets remains unchanged despite the increase in the price of burgers. With an increase in weekly spending money, Alphonso's budget constraint expands, allowing him to purchase more of both goods or allocate his money differently. The price increase in bus tickets shifts the budget constraint inward, reflecting the decreased affordability of bus tickets.

Step-by-step explanation:

The opportunity cost of bus tickets is based on the value of the next best alternative. In this case, the price of burgers rising from $2 to $4 does not change the opportunity cost of bus tickets because it is a separate decision and does not affect the value or benefit of taking the bus.

With Alphonso's weekly spending money increasing from $10 to $20, his budget constraint expands, allowing him to consume more of both goods (bus tickets and burgers). This means that he can afford to buy more of both items or choose to allocate the additional spending money more towards one item over the other.

The budget constraint is a graphical representation of the different combinations of goods that can be purchased given a fixed budget and set prices. When the price of bus tickets rises, the budget constraint shifts inward, showing that Alphonso can afford to purchase fewer bus tickets at any given price. The opportunity cost of bus tickets remains unchanged because it is determined by the relative prices of the goods, not Alphonso's budget.

Answer 2

Step-by-step explanation:

The opportunity cost does not change because before Alphonso had to sacrifice 4 bus tickets when he ate a burger, because with the $2 that he spent, he could buy 4 tickets. And he had to sacrifice 1/4of a burger when he decided to purchase a bus ticket. Now he needs to sacrifice the same: if he decides to buy a bus ticket ($1) he sacrifices 1/4 burger and when he decides to buy a burger ($4), he sacrifices 4 bus tickets. His budget constraint is negatively affected because the price of both goods increased. If this income does not change, now he can consume less burgers and less bus tickets.

For example: Alphonson´s income was $8. Before, if he used all his income in burgers, he could purchase 4 units. And if he used all his income in bus tickets, he could purchase 16 units. Now (if his income remains the same), if he uses all his income in burgers, he can purchase 2 units. And if he uses all his income in bus tickets, he can purchase 8 units. The figure attached is the consumption possibilities frontier, which represents Alphonso´s consumption decisions. The slope represents the opportunity cost between burgers and bus tickets. Notice that the curve shifted to the left because now he can purchase less burgers and less bus tickets.