Question

John spends all his money on his car and clothes. Every month he has $1000 to spend, and each time he takes the car to the garage, it costs him $200, while each article of clothing he buys costs him $250.  

What is the opportunity cost of one car trip to the garage? Briefly show your math.

In the space below, draw John’s budget constraint, making sure to label every axis, line, intercept, and slope.

John’s grandmother gave him a hideous sweater for Christmas, and asked him to wear it frequently (so that he cannot sell it on eBay). In the graph above, draw the new budget constraint with the gift of sweater.

If John prefers to have 4 articles of clothing (including the ugly sweater), how many trips to the garage can he afford (garage trips don’t have to be whole numbers)?

Answer 1

Answer

(a) Opportunity Cost of one Car trip = 4/5 = 0.8 clothes. (b) Budget line is AB. The vertical intercept = 1000/200 = 5 and horizontal = 1000/250 = 4 New budget Constraint is AC. In other words the Car now have 5 clothes. (d) As shown by D point he can make 1 garage trip