1. Suppose that consumer is spending all his income on goods A and B. The price
ID: 1107527 • Letter: 1
Question
1. Suppose that consumer is spending all his income on goods A and B. The price per unit of good A is 8 euros and the price per unit of good B is 4 euros. Consumer’s income is 1000 euros.
a) Describe the consumption possibilities of this consumer by the budget line equation. (Use A to denote the quantity of good A and use B to denote the quantity of good B) (NB! Only the budget line equation is required. Graph is not required.)
b) Find the opportunity cost of consuming 10 units of good A for this consumer (measured in terms of units of good B)
Explanation / Answer
Answer
a)
The budget line equation is the form of
PxX+PyY=M
where
Px and Py are prices of the X and Y goods respectively
then the equation is
8A+4B=1000
b)
The price of A is double of price of B which means the consumer can purchase one unit of good A or two unit of good 2 so the opportunity cost of one unit of good A is 2 unit of B which means opportunity cost of 10 unit of good A is 20 unit of good B
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