Suppose that Russ has budgeted $20 a month to buy candy bars, music downloads, or some combination of both. If Russ spends all his budget on candy bars he can obtain 40 bars a month; if he buys only downloads, he can buy 20 a month.

a. What is the price of a candy bar?

b. What is the price of a music download?

c. What is the opportunity cost of a music download?

d. What is the opportunity cost of a candy bar?

e. Would the opportunity cost of each good change if Russ decided to increase his monthly budget to $30 for the two items?

Answer: a) 50 cents b) $1 c) 2 candy bars d) 0.5 music downloads e) No

Explanation:

a) The price of a candy bar

This is gotten by dividing the $20 budget by the 40 bars which he can obtain a month

= $20/40 = $.50 = 50cents

b) The price of a music download

This is gotten by by dividing the $20 budget by the 20 downloads he is able to buy in a month.

= $20/20 = $1

c) The opportunity cost of a music download is the number of candy bars which is given up to get it.

The purchase of 1 more music download is $1 per download and requires the sacrifice of = $1/$.50 = 2 candy bars

d) The opportunity cost of candy bar is the number of music download which is given up to get it is given as = $.50/$1 = 0.5 = ½ music downloads

e) No, the opportunity cost would not change This is because the prices of the two goods remains the same and have not changed. it would only change if Russ either buys more candy bars and/or music downloads than before. for now, the opportunity cost of music downloads remains 2 candy bars and the opportunity cost of candy bars remains ½ (0.5) music downloads.