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

Suppose Alphonso's town raises the price of bus tickets from $0.50$dollars to $1$dollars and the price of burgers rises from $2$dollars to $4$dollars. Why is the opportunity cost of bus tickets unchanged? Suppose Alphonso's weekly spending money increases from $10$dollars to $20$dollars How is his budget constraint affected from all three changes? Explain.

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Key Concepts

Budget Constraint

The budget constraint represents all combinations of goods that can be purchased given a consumer's income and the prices of the goods. If the income increases while the relative prices remain the same (as in when both prices are doubled), the budget line shifts outward, allowing the consumer to reach higher levels of utility. The new, higher income expands the set of feasible consumption bundles but preserves the original trade-off between goods as dictated by the unchanged relative prices.

Opportunity Cost

Opportunity cost is the value of the next best alternative that must be given up when a particular choice is made. In consumer theory, it is measured by the ratio of the prices of the two goods, which indicates the trade-off rate between them. When both prices change proportionally, the numerical ratio—and hence the opportunity cost—remains unchanged despite the nominal price changes.

Relative Prices and Slope of the Budget Line

The slope of the budget constraint is determined by the relative prices of the two goods. Since doubling both prices leaves the ratio of the prices unchanged, the slope of the budget line remains the same. This means that the rate at which a consumer can trade one good for another does not change even though the absolute prices have increased.

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