Suppose that a consumer purchases just two goods, X and Y. The slope of the budget line would indicate the
A) opportunity cost of good Y in terms of good X given up for each unit of Y.
B) opportunity cost of good X in terms of good Y given up for each unit of X.
C) maximum quantity of good Y that the consumer could buy with a given budget.
D) maximum quantity of good X that the consumer could buy with a given budget.

Question

Quizplus · Accepted Answer

The slope of the budget line represents the rate at which the consumer can trade one good for another (i.e. the opportunity cost). Specifically, the slope is the negative of the ratio of the prices of the two goods (Px/Py), which indicates the amount of good Y the consumer must give up to purchase one unit of good X. Therefore, the slope of the budget line represents the opportunity cost of good X in terms of good Y given up for each unit of X.

Suppose That a Consumer Purchases Just Two Goods, X and Y