Suppose the price of X is $40, the price of Y is $50 and a consumer has

Question:

Suppose the price of X is $40, the price of Y is $50 and a consumer has income of $400.

a. Draw the budget constraint for this consumer. What is the opportunity cost of buying one unit of good X?

b. Which of the following combinations of X and Y will be represented by a point on the consumer’s budget constraint?

c. Plot the three bundles in your budget constraint diagram.

i. 10 units of X and 1 unit of Y

ii. 5 units of X and 4 units of Y

iii. 1 unit of X and 2 units of Y

Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...