Question

Budget Constrain In the 13,000 economists, one question episode economist Lisa Cook singles out opportunity cost as the key idea in economics. Help Will understand oppoltunity cost: a) His father gave him a $30 gift card to Target for his birthday. He likes Lego sets which cost $10 each and lollipops which cost \$2 each. Graph Will's budget constraint with Lego sets on the Y axis and lollipops on the X axis. b) What is the opportunity cost of a Lego set? What is the opportunity cost of a lollipop? Where do we see this on the graph? c) Show what happens to his budget constraint if Lego toys go on sale for only $6 each! d) On a new graph, redraw your answer from (a) and then show what happens to his budget constraint if he gets his flu shot at Target and earns a \$10 gift card.

Answer 1

Opportunity cost is the value of the next best alternative that is given up in order to obtain something else. Will's budget constraint can be graphed with Lego sets on the Y axis and lollipops on the X axis. The opportunity cost of a Lego set is 5 lollipops, and the opportunity cost of a lollipop is 1/5 of a Lego set. The budget constraint can shift outward if Lego toys go on sale or if Will earns a gift card.

Step-by-step explanation:

The concept of opportunity cost in economics refers to the value of the next best alternative that is given up in order to obtain something else.

In the scenario given, Will's father gave him a $30 gift card to Target.

He can choose to buy Lego sets for $10 each or lollipops for $2 each.

We can graph Will's budget constraint by putting Lego sets on the Y axis and lollipops on the X axis.

1. The opportunity cost of a Lego set is the number of lollipops Will would have to give up to get one more Lego set, while staying within his budget.
2. In this case, the opportunity cost of a Lego set is 5 lollipops.
3. The opportunity cost of a lollipop is the number of Lego sets Will would have to give up to get one more lollipop, while staying within his budget. In this case, the opportunity cost of a lollipop is 1/5 of a Lego set.
4. We can see the opportunity cost on the graph by looking at the slope of the budget constraint.
5. The slope represents the rate at which Will has to trade one good for another.
6. In this case, the slope of the budget constraint will be -5, since for every additional Lego set, Will has to give up 5 lollipops to stay within his budget.
7. If Lego toys go on sale for $6 each, Will's budget constraint will shift outward, allowing him to buy more Lego sets with the same amount of money. This means that the budget constraint will become flatter, since he can now afford more Lego sets without giving up as many lollipops.
8. If Will gets his flu shot at Target and earns a $10 gift card, his budget constraint will shift outward again, allowing him to buy more of both Lego sets and lollipops.
9. However, the exact effect on the budget constraint will depend on the prices of Lego sets and lollipops, as well as the value of the flu shot and the gift card.