Question

When Bill's Diner moves from the production combination of 35 burgers and 25 hotdogs to the combination of 25 burgers and 65 hotdogs, what is the opportunity cost of each additional hotdog

Answer 1

Answer:

In the context of Consumer Theory or Indifference Curve involving two goods,the opportunity of any one good is computed by how much of the other good is foregone or sacrificed to purchase one more unit of that particular good.

Explanation:

• In this instance,when Bill's diner consumes 35 burgers and 25 hotdogs,its opportunity cost of additional hot dog=$\frac{35}{25} =\frac{7}{5}=1.4$.Therefore,initially Bill diner's opportunity cost of an additional hot dog is 1.4 units of burger.

• Now,when Bill's diner chooses to consume a combination of 25 burgers and 65 hot dogs,its opportunity cost of additional hot dogs=$\frac{25}{65} =\frac{5}{13} =0.385$ approximately.Hence,Bill's diner is willing to sacrifice approximately 0.385 units of burger to consume an additional unit of hot dog.
• Now,due to the change in consumption combination,the change in opportunity cost of additional hot dog=$(1.4-0.385)=1.015$ units of burger.Notice,that here the opportunity cost of additional hot dog decreased from 1.4 units of burger to 0.385 units of burger as Bill's diner changed the consumption combination of both burgers and hot dogs.