Question

Suppose a consumer can spend her income in good 1 and in good 2. If the income of this consumer increases due to a salary increase, then the opportunity cost of good 1 in terms of good 2 for this consumer also increases. True or False?

Answer 1

The statement is generally false as an increase in income does not necessarily increase the opportunity cost of one good in terms of another; it generally allows a consumer to buy more of both goods, reflecting a higher level of utility on a new indifference curve.

Step-by-step explanation:

The question of whether the opportunity cost of good 1 in terms of good 2 for a consumer increases with a salary increase is generally false. Opportunity cost refers to the cost of an alternative that must be forgone in order to pursue a certain action. In this case, if a consumer's income increases, that does not necessarily affect the opportunity cost between two goods directly. Instead, suppose a consumer can now buy more of both goods with the increased income. The budget constraint for the consumer shifts to the right, and they can achieve a higher level of utility as depicted by a new, higher indifference curve. This increase in purchasing power typically does not increase the opportunity cost of one good relative to another. However, if the price of one good increases or decreases independently of income changes, that can affect the opportunity cost.