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Question 1 David has a weekly budget of $24, which he likes to spend on magazines...

Question 1
David has a weekly budget of $24, which he likes to spend on magazines and pies. If the price of a magazine is $6 and the price of a pie is $8:

a. Draw David’s budget line by taking pies on the horizontal axis and magazines on the vertical axis

Answer:

b. Calculate the slope of the budget line?

Answer:

c. What is David’s opportunity cost of purchasing a pie?

Answer:

d. If David purchase 1 magazine and 1 pie, what is the opportunity cost of buying 1 extra pie

Answer:

e. If David purchase 2 magazine and 1.5 pie, what is the opportunity cost of buying 1 extra pie?

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Answer #1

(b) Slope of a budget line:- Px/Py = Price of pies/ Price of magazines = 8/6 = 1.333..

(c) Opportunity cost implies cost of availing one opportunity in terms of loss of another opportunity. So, David's opportunity cost of purchasing a pie will be magazine.

(d) The opportunity cost of buying 1 extra pie will be 1 unit of magazine.

(e) Opportunity cost of David for 1.5 pie = 2 magazines

Opportunity cost of David for 1 pie = 2/1.5 magazines (Unitary Method) = 1.333.. magazines

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