A
To discuss: The welfare when the prices of food and housing increase by 50%, with income remaining constant.
A
Answer to Problem 1RQ
Since the individual is remained with less income, the condition of the individual will become worse with an increase in the prices.
Explanation of Solution
Real Income represents that part of income of an individual, resulting after adjusted with the affects of
Since, there is no change in the income level of the individual, the increase in the prices of food and housing by 50% will leave the individual with less real income. This means the condition of the individual will become worse with an increase in the prices.
B
To discuss: The welfare when prices of food and housing, along with the income of the individual were increased by 50%.
B
Answer to Problem 1RQ
The welfare condition of the individual will remain the same, as the increase in prices will be cancelled out with a proportionate increase in the income levels.
Explanation of Solution
Real Income represents that part of income of an individual, resulting after adjusted with the affects of price changes of the goods and services.
If there is an increase in both the price level and in the income levels at the same rate, the welfare condition of the individual will remain the same; as we can see that the rise in income levels will nullify the rise in price levels.
C
To discuss: The welfare when the price of food increases by 50%, price of housing remains unchanged, and the income of the individual increases by 25%.
C
Answer to Problem 1RQ
The condition of the individual would become worse, for the proposed changes, as, the increase in the income is not sufficient to nullify the increase in the price of the food.
Explanation of Solution
Real Income represents that part of income of an individual, resulting after adjusted with the affects of price changes of the goods and services.
Since the food and housing are consumed in a fixed proportion, any raise in the price of food leads, to decrease in the level of consumption of food resulting in a similar proportion of decrease in the consumption level of housing.
Moreover, while the raise in income is only 25%, the raise in price of food is by 50%. This increase in the income is not sufficient to nullify the impact of increase in the food price. Thus, we can conclude that such proposed changes will worsen the condition of the individual.
D
To discuss: The welfare when the price of housing increases by 50%, price of food remains unchanged, and the income of the individual increases by 25%.
D
Answer to Problem 1RQ
The condition of the individual would become worse, for the proposed changes, as, the increase in the income is not sufficient to nullify the increase in the price of the housing.
Explanation of Solution
Real Income represents that part of income of an individual, resulting after adjusted with the affects of price changes of the goods and services.
Since the food and housing are consumed in a fixed proportion, any raise in the price of housing leads to decrease in the level of consumption of housing resulting in a similar proportion of decrease in the consumption level of food.
Moreover, while the raise in income is only 25%, the raise in price of housing is by 50%. This increase in the income is not sufficient to nullify the impact of increase in the price of housing. Thus, we can conclude that such proposed changes will worsen the condition of the individual.
E
To discuss: The change in c and d when the individual is willing to make changes to the mix of food and housing in proportionate to the price changes.
E
Answer to Problem 1RQ
No, there will be no change in the answers provided for parts C and D, with the proposed changes.
Explanation of Solution
Real Income represents that part of income of an individual, resulting after adjusted with the affects of price changes of the goods and services.
There will not be any change in the derived conclusions in parts C and D with the recommended changes in mix of food and housing. This is because both the food and housing are consumed in a fixed proportion, which results in a similar change in the other good when there is a change in the price of the other. This means, for instance, if there is an increase in the price of food, there would be a decrease in the demand for both food and housing in proportion of their mixture.
Want to see more full solutions like this?
Chapter 3 Solutions
EBK INTERMEDIATE MICROECONOMICS AND ITS
- Consider a consumer who wants to consume only two commodities and has an income of $250. Assume the price of good 1 is $25 per unit and the price of good 2 is $50 per unit. Now, inflation causes the price of good 1 to increase to $30 per unit, while the price of good 2 increases to $60 per unit. On the other hand, the consumer also gets a raise of $110 (so her new income is $360). What will happen to the consumption bundles (x₁, x₂)?arrow_forwardAssuming ceteris paribus (all other things being equal), What are the effect of the following on a couple’s demand for children and other goods?1. Increase in a couple’s income 2. Increase in the net price of childrenarrow_forwardIn not more than six (6) sentences and assuming ceteris paribus (all other things being equal), discuss fully the effect of the following on a couple’s demand for children and other goods:1. Increase in a couple’s income 2. Increase in the net price of childrenarrow_forward
- Muhammad’s demand for fresh fish is perfectly income inelastic, and his income increases. If Muhammad’s preferences for fish are well-behaved, show the effect of this increase in income on the change in his optimal choice of fresh fish, his expenditure on all other goods, and draw his income-consumption curve. Clearly label your graph.arrow_forwardE1 Suppose the Federal Government issues $100 worth of food stamps to everyone in your city. These stamps are coupons that can be exchanged for $100 worth of food at the grocery store and they can be used only by the person to whom they are issued. Draw your budgetline between “food’ and “all other goods” both before and after the food stamps are issued. Assume the price of food = price of “all other goods” = $1.00 and the individual’s initial income is $200.arrow_forwardConsider a consumer who wants to consume only two commodities and has an income of $250. Assume the price of good 1 is $25 per unit and the price of good 2 is $50 per unit. Now, inflation causes the price of good 1 to increase to $30 per unit, while the price of good 2 increases to $60 per unit. On the other hand, the consumer also gets a raise of $110 (so her new income is $360). What will happen to the consumption bundles (x₁, x₂)? How much units will increase for both x₁ and x₂?arrow_forward
- Mark can work up to 80 hours each week at a pre-tax hourly wage of $20 but faces a constant 20 percent tax on his earnings. Thus, Mark maximizes his utility by choosing to work 50 hours per week. The government proposes a negative income tax whereby everyone is given $300 per week and anyone can supplement their income further by working. To pay for the negative income tax, tax on earnings will be increased to 50 percent. On a single graph, draw Mark's original budget line and his budget line under the negative income tax. Show that Mark will work fewer hours if the negative income tax is implemented Will Mark's utility be greater under the negative income tax? Discuss your answer.arrow_forwardPart 1: Ambrose's brother Anselm has an income of $265 and a utility function U(x1,x2)=70x^1/2 + x2. The price of good 1(nuts) is $5 and the price of good 2 (berries) is $1. How many units of nuts will Anselm demand? Part 2: Ambrose's brother Augustine has an income of $128 and a utility function U(x1,x2)=36x^1/2 + x2. The price of good 1(nuts) is $3 and the price of good 2 (berries) is $1. How many units of berries will Augustine demand?arrow_forwardSteve spends all his income on meals at restaurants and paperback novels. His usual restaurant meal costs $20, and paperback books cost $10. When Steve’s monthly income is $250, he goes out to eat 10 times and purchases 5 books. When his income rises to $280, he goes out to eat 8 times and purchases 12 books. Determine whether the following statements are true or false: Paperback books are normal goods Restaurant meals are necessity goods Paperback books are luxury goodsarrow_forward
- Discuss the effect of each of the following to a couple’s demand for children and other goods: a. Increase in a couple’s income b. Increase in the net price of childrenarrow_forwardExplain how the budget constraint might change if income and prices of all goods increased in same proportion?arrow_forwardWhat happens to the budget line if the price of good 2 increases, but the price of good 1 and income remain constant?arrow_forward
- Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning