Faruq spends all of his income on tacos and milkshakes.His income is $100,the price of tacos is $10,and the price of milkshakes is $2.Put tacos on the horizontal axis and milkshakes on the vertical axis.If Faruq spends all of his income,the opportunity cost of one taco equals _____ milkshakes.
A)2
B)10
C)5
D)1/5

Question

Quizplus · Accepted Answer

If Faruq spends all of his income, he can buy 10 tacos or 50 milkshakes (($100/$10) and ($100/$2) respectively). The opportunity cost of one taco equals the number of milkshakes he could have bought with the same amount of money. So, the opportunity cost of one taco is 5 milkshakes. Therefore, he should buy more tacos only if the marginal utility of tacos (satisfaction from the last taco he buys) is greater than 1/5 (the opportunity cost of one taco in terms of milkshakes). As we do not have any information on marginal utility, we cannot determine the best choice(s) for him.

Faruq Spends All of His Income on Tacos and Milkshakes