Question

78. Suppose a consumer spends her income on two goods: music CDs and DVDs. The price of a CD is $8, and the price of a DVD is $20. If we graph the budget constraint by measuring the quantity of CDs purchased on the vertical axis and the quantity of DVDs on the horizontal axis, what is the slope of the budget constraint?

a. -5.0
b. -2.5
c. -0.4
d. The slope of the budget constraint cannot be determined without knowing the income the consumer has available to spend on the two goods.

Answer 1

The slope of the budget constraint with CDs on the vertical axis and DVDs on the horizontal axis is -0.4, representing the opportunity cost of DVDs in terms of CDs.

Step-by-step explanation:

The slope of a budget constraint represents the opportunity cost of the good on the horizontal axis, which in this case is DVDs. To find the slope, we take the negative ratio of the prices of the two goods, because purchasing more of one good implies sacrificing some quantity of the other. Thus, the slope is calculated as the negative price of CDs divided by the price of DVDs:

- Price of a CD / Price of a DVD = - $8 / $20 = -0.4

This means that the slope of the budget constraint, when CDs are on the vertical axis and DVDs on the horizontal, is -0.4. Therefore, for every DVD the consumer buys, they give up the opportunity to buy 0.4 CDs.