Suppose Alphonso's town raised the price of bus tickets to ...

Suppose Alphonso's town raised the price of bus tickets to $\$ 1$ per trip (while the price of burgers stayed at $\$ 2$ and his budget remained $\$ 10$ per week.) Draw Alphonso's new budget constraint. What happens to the opportunity cost of bus tickets?

Key Concepts

Relative Prices

Relative prices are expressed by comparing the prices of the two goods and determine the slope of the budget constraint. When the price of bus tickets rises to $1 while the price of burgers remains at $2, the ratio of bus tickets to burgers changes, increasing the opportunity cost of bus trips in terms of the number of burgers that must be sacrificed. This change in relative prices also potentially alters the consumer’s choice pattern, as the trade-off between the goods becomes steeper than it was under the previous pricing scheme.

Opportunity Cost

Opportunity cost is the value of the next best alternative forgone when a decision is made. In the budget line context, it is represented by the slope of the line – the rate at which one good must be sacrificed to obtain an additional unit of the other good. Here, because a bus ticket costs half as much as a burger, each additional bus ticket costs the consumer half a burger in terms of forgone consumption.

Budget Constraint

The budget constraint represents all the possible combinations of two goods that a consumer can purchase given a fixed income and the prices of those goods. In this context, with a weekly budget of $10, the intercepts of the budget line are determined by spending all available funds on one good or the other (10 bus trips if only bus tickets are purchased at $1 each, or 5 burgers if only burgers are bought at $2 each). The line connects these points, illustrating the trade-off between bus trips and burgers.

Transcript

Please give Ace some feedback