A consumer has $1,000 a week to spend on renting square feet of housing x1 (at a price of $5 per square foot) and eating out meals x2 (at a price of $20 per meal). Derive the budget line equation and find the opportunity cost of housing in terms of meals in your equation.
What will be an ideal response?
The budget equation x2=I/p2- (p1/p2)x1 becomes x2=1000/20 - (5/20)x1 or x2=50 - (1/4)x1. The slope of the budget line is equal to the opportunity cost of housing in terms of meals --- and this slope is -1/4 in the equation.
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