Project 1: The Budget Constraint & Opportunity Cost

Suppose your town raised the price of public transportation tickets to $1 per trip (while the price of tacos, your favorite food, stayed the same at $2 and your budget remained $20 per week) from $0.50. Draw your new and previous budget constraint (graph must be embedded in your response and uploaded). What happens to the opportunity cost of tickets in terms of tacos (it goes up, down, stays the same)? Explain your answer and why?

Reminder: The opportunity cost of tickets is the number of burgers that must be given up to obtain one more bus ticket.

Questions:

Explain why scarcity leads to tradeoffs.

Explain why individuals make choices that are directly on the budget constraint, rather than inside the budget constraint or outside it.

Explain how the budget constraint is similar and different to the production possibility curve.

Critical Thinking:

Suppose your town raises the price of tickets from $0.50 to $1 and the price of tacos rises from $2 to $4. Why is the opportunity cost of bus tickets unchanged? Suppose your weekly spending money increases from $20 to $40. How is his budget constraint affected from all three changes? Explain.

Problems:

Use this information to answer the following 4 questions:

Julie has a weekly budget of $24, which she likes to spend on slurpees and hot dogs.

If the price of a slurpees is $3 each, what is the maximum number of slurpees she could buy in a week?

If the price of a hot dogs is $1, what is the maximum number of hot dogs she could buy in a week?

Draw Julie's budget constraint with hot dogs on the horizontal axis and slurpees on the vertical axis. What is the slope of the budget constraint?

What is Julie's opportunity cost of purchasing a hot dog?