Many elderly people in the US receive Social Security payments as their sole source of income. Because of this, there have been attempts to adjust these payments so as to keep up with changing prices (inflation). This process is called "indexing"; this question will lead you through the process. Suppose that in the year 2018, a typical Social Security recipient consumed only Food (F) and Housing (H). The price of housing was $150/unit and the price of food was $50/unit. Denote the quantities of food and housing per month by F and H respectively. This consumer received $1500/month and consumed 5 units of housing and 15 units of food. (a) Write out the consumer's budget constraint and demonstrate that the bundle chosen falls on that budget constraint. (b) Draw the budget constraint on a graph (Housing on the horizontal axis) with the optimal bundle labeled. Draw the indifference curve through that optimal bundle. Assume preferences are well behaved.

Many elderly people in the US receive Social Security payments as their sole source of income. Because of this, there have been attempts to adjust these payments so as to keep up with changing prices (inflation). This process is called "indexing"; this question will lead you through the process. Suppose that in the year 2018, a typical Social Security recipient consumed only Food (F) and Housing (H). The price of housing was $150/unit and the price of food was $50/unit. Denote the quantities of food and housing per month by F and H respectively. This consumer received $1500/month and consumed 5 units of housing and 15 units of food. (a) Write out the consumer's budget constraint and demonstrate that the bundle chosen falls on that budget constraint. (b) Draw the budget constraint on a graph (Housing on the horizontal axis) with the optimal bundle labeled. Draw the indifference curve through that optimal bundle. Assume preferences are well behaved.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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