Question

Carmelo is choosing how much pudding and how much of meat to purchase with limited budget of $200. The price of pudding (measured on vertical axis) is $1 per pound and the price of meat (measured on horizontal axis) is $4 per pound. The OC of pudding is

a. 4 units of meat

b. 1/4 units of meat

c. 1/2 units of meat

d. 4 units of pudding

Answer 1

Answer= Option b- 1/4 units of meat
Carmelo has a budget= $200.
This person has to allocate this amount of money purchasing the two choices that are pudding and meat. With a limited budget however this person have couple of choices.
Price of pudding= $1 per pound
Price of meat= $4 per pound.
Hence budget constraint Price of pudding* units of pudding+ Price of meat* units of meat
$200 $1* units of pudding + $4* units of meat

Suppose Carmelo decides to buy pudding only, then Carmelo gets 200/1= 200 pound
Suppose Carmelo decides to buy meat only, then Carmelo get 200/4= 50 pound
But suppose Carmelo wants to buy a combination of both meat and pudding. Here comes the concept of opportunity cost- Value of next best alternative.
Hence, Opportunity cost of pudding=
200 pound of pudding= 50 pound of meat
1 pound of pudding ($1)= 50200= 1/4
Hence the opportunity of pudding= 1/4 units of meat