Question

Suppose you are choosing between milk and cookies. If the opportunity cost of cookies in terms of milk decreases, then the budget curve will:

shift inward

rotate inward.

shift outward

rotate outward

Answer 1

Solution .The budget line will rotate outward. Opportunity cost refers to the units of goods that is sacrificed if one unit of other good is choosen.

For example : Let us suppose that we have :

Money income = 400

Price of milk =25

And price of cookies=4

Now let us draw the budgetline for this :

So the budget line will be constructed like this :

Let us put cookies on y-axis and milk on x-axis.

So X-intercept = 400/25 =16

and Y-intercept =400/4=100

So the budget line will be AB as shown in the diagram :

Now lets us calculate the opportunity cost of one cookie.

100 cookies = 16 milk

1 cookie =16/100 = .16 milk

That means if we buy 1 cookie we have to sacrify 0.16 units of milk.

Now the question states that opportunity cost has increased ,so let us suppose that

100 cookies = 20 milk

1 cookie =20/100 = .20 milk

Now see for one cookie we have to sacrify 0.20 units of milk .So the opportunity cost has increased.This means that definitely the price of milk has increased due to which we are able to buy more of milk with our limited budget.So this will rotate the budget outward.This is because whenever the price of a commodity decreases more of that commodity can be purchased.