Question

Suppose that your grandmother gave you 3 vests and 2 pairs of corduroys for your birthday, and you are deciding whether or not to keep the gift or exchange it for a different combination of vests and corduroys. Unfortunately, you did not get a gift receipt for the items, so the only way to return the clothing is to receive store credit for their current price. A week later you head to the store to check out the current prices of vests and corduroys. It turns out that corduroys are priced at $20 per pair and vests are priced at $40 per vest. On the graph below, use the blue line (circle symbols) to graph your budget constraint (BC), given these prices. Then, use the black point (X symbol) to indicate your endowment of corduroys and vests. Dashed drop lines will automatically extend to both axes. VESTS 10 nitial BC Endowment New BC 0 1 2 3 4 5 6 78 9 10 PAIRS OF CORDUROYS Help Clear All

Answer 1

(1) Initial value = $20 x 2 + $40 x 3 = $40 + $120 = $160

Initial budget line: 160 = 20C + 40V, or 8 = C + 2V where C, V: Number of corduroy and vest respectively

When C = 0, V = 8/2 = 4 (Vertical intercept) and when V = 0, C = 8 (Horizontal intercept).

VESTS 10 Initial BO Endowment New BC 4 0 12 3 4 5 6 7 8 910 PAIRS OF CORDUROYSHelp ler All

(2) New value = $30 x 2 + $30 x 3 = $60 + $90 = $150

New budget line: 150 = 30C + 30V, or 5 = C + V

When C = 0, V = 5 (Vertical intercept) and when V = 0, C = 5 (Horizontal intercept).

(3) TRUE

With initial prices, Opportunity cost of C = 4/8 = 0.5 V

With new prices, Opportunity cost of C = 5/5 = 1 V

Therefore Opportunity cost has increased.