Carmelo is choosing how much pudding and how much of meat to purchase with limited budget...

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

Expert Solution

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

Rahul Sunny answered 2 years ago

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