What is the relationship between the slope of the budget line and the notion of opportunity cost?
What will be an ideal response?
The slope of the budget line represents the opportunity cost of one good in terms of the other. Suppose we have two goods: fish and chips. If the price of fish (Pf) is $2 and the price of chips (Pc) is $8, then the price ratio ?Pc/Pf = ? 8/2 = ? 4. This means that if I want 1 more unit of chips, I have to give up 4 more units of fish. Therefore, the opportunity cost of 1 unit of chips is given by the slope, ? 4, in terms of the number of fish that has to be given up.
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