Question

Ron consumes two goods: pizza and coke. Assume he can just afford the bundles (P, C) = (6, 3) and (P, C) = (5, 6).

1. What is his opportunity cost of buying a coke?

2. If the price of a pizza is $6, how much income does he have?

3. Find an equation for his budget line.

Answer 1

Q1) the two affordable bundles are: (6,3) and (5,6)

Thus, an increase in cokes from 3 to 6 leads to a fall in pizza by 1

The opportunity cost of coke = number of units of pizza lost = 1/3

Q2) If price of pizza = 6

Let price of coke be c

we have

6*6 + 3c = income

and,

5*6 + 6c = income

Thus, 30 + 6c - 36 - 3c = 0

=> -6 + 3c = 0

=> c = 2

Thus, total income = 6*6 + 3c = 36 + 6 = 42

Q3) Equation of budget line is as follows

PpQp + PcQc 42

Where Pp and Pc is price of pizza and coke respectively, and Qp and Qc is quantity of pizza and coke respectivel