Question

Suppose Alphonso’s town raised the price of bus tickets to \(1 per trip (while the price of burgers stayed at \)2 and

his budget remained $10 per week.) Draw Alphonso’s new budget constraint. What happens to the opportunity cost

of bus tickets?

Short answer

The formula for opportunity cost of bus tickets is:

$\frac{∆\text{PriceofBurgers}}{∆\text{PriceofBustickets}}$.

Hence, as the price of bus tickets rises, the opportunity cost of bus tickets falls.

Step-by-step solution

Introduction

Budget Constraint: A budget constraint is an equation that illustrates possible combinations of units of good purchased at a given price with a given income.

The expense of the next best alternative activity is known as the opportunity cost.

Explanation

The equation of budget constraint is :

${\text{P}}_{BT}{\text{×Q}}_{BT}{\text{+P}}_B{\text{×Q}}_B\text{=I}$

where,

${\text{P}}_{BT}\text{=}$Price of Bus Ticket

${\text{Q}}_{BT}\text{=}$Quantity of Bus Ticket

${\text{P}}_B\text{=}$Price of Burger

${\text{Q}}_B\text{=}$Quantity of Burger ,$\text{I=}$Income

Conclusion

Therefore, the equation of new budget constraint is :

$\$1\times {\text{Q}}_{BT}{\text{+\$2×Q}}_B\text{=10}$.

The formula for opportunity cost of bus tickets is:

$\frac{∆\text{PriceofBurgers}}{∆\text{PriceofBustickets}}$.

Hence, the opportunity cost of bus tickets would decline with an increase in the price of bus ticket and would increase if the price of bus tickets fall.