Suppose Alphonso’s town raises the price of bus tickets from 0.50 to 1 and the price of burgers

Suppose Alphonso’s town raises the price of bus tickets from...

Key Concepts

Opportunity Cost

Opportunity cost refers to the value of the best alternative forgone when a choice is made. In this context, even though the absolute prices of the two goods have increased, the rate at which one can trade one good for the other remains unchanged because both prices have increased proportionally. This means that the cost, measured in terms of what is given up of the alternative, remains the same despite the nominal price change.

Relative Prices

Relative prices express the price of one good in exchange for the other and are central to understanding consumer decisions. When all prices change by the same proportion, the ratio between them remains constant. This constancy ensures that the trade-off between the goods does not change, so consumers face the same relative cost when deciding between the goods.

Budget Constraint

A budget constraint represents the combinations of goods a consumer can afford given their income and the prices of those goods. Changes in the income or prices shift or rotate the budget line. Specifically, if all prices double, the intercepts (maximum affordable quantity of each good) decrease, but when the income also increases proportionally, the budget constraint will shift outward, reflecting an increase in purchasing power while maintaining the same slope if the price ratios remain constant.

Income Effects

The income effect describes the change in consumption resulting from a change in a consumer's purchasing power, holding relative prices constant. When the consumer's income increases, the budget line shifts outward, allowing for higher consumption of both goods. In this situation, despite changes in nominal prices, if the income increases in a way that offsets the cost increases, the consumer's ability to purchase combinations of goods is partially restored, though the maximum quantities affordable may still differ from the original levels.

Transcript

00:01 Okay, so this problem says that suppose alfonso's town raises the price of bus tickets from 0 .5 to 1, and the price of the burgers raises from 2 to 4.

00:16 Why is the opportunity cost of bus tickets unchanged? so first of all, we need to understand what the opportunity cost means.

00:26 So economics used to term opportunity cost to indicate what must be given up to obtain something.

00:33 That is desired.

00:35 The idea behind opportunity cost is that the cost of one item is the lost opportunity to do or consume something else.

00:44 In short, opportunity cost is the value of the next best alternative.

00:50 And here, since the alternative for the bus tickets are the burgers, we want to know that for the price that we pay for each bus tickets, how many burgers that we can buy.

01:03 So before we know that for each of the bus tickets, the price is going to be 0 .5 and then we divided that by the price of the burgers, which is 2.

01:18 And then we know that for each of the bus tickets that we've purchased, we give up the opportunity of buying one -fourth of the burgers.

01:34 And then, then after, we divide the price for the bus tickets by the price of the burgers, which is still one -fourth of the burgers.

01:53 And then from here, we know that the two answers are the same.

02:00 And then, secondly, we want to know that how the budget constraint has changed from all three changes.

02:09 So first of all, the budget constraint here is going to be the budget equals the price of the burgers times the quantity of the burgers, plus the price of the bus tickets, times the quantity of bus tickets.

02:43 So before, we know that the budget is going to be $10, and that equals to the price of the burgers, which is $2 ,000, times the quantity of the burgers, plus the price of the bus tickets, which is 0 .5 times the quantity of bus tickets.

03:20 And then we're going to rearrange this equation to solve for it...

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