A consumer has a monthly income of $100 that he wants to spend on two

A consumer has a monthly income of $100 that he wants to spend on two goods: rugs priced at $10 and chairs priced at $5.

What is the consumer’s opportunity cost of buying a rug? What is his opportunity cost of buying a chair? Use a table to represent the consumer’s budget constraint.

ANSWER

Opportunity cost is the best alternative use of a resource. Buying one rug costs $10, and each chair costs $5. So, one rug can be purchased with the same amount of money used to buy two chairs. Therefore, the opportunity cost of buying a rug is 2 chairs. Similarly, the opportunity cost of buying a chair is half a rug.

The consumer’s budget constraint is given by:
$100 = 10 × (Quantity of rugs) + 5 × (Quantity of chairs)

The following table shows the various combinations of rugs and chairs that the consumer can buy with $100.

Budget Quantity of Rugs Quantity of Chairs
100 10 0
100 9 2
100 8 4
100 7 6
100 6 8
100 5 10
100 4 12
100 3 14
100 2 16
100 1 18
100 0 20