Suppose that in the year 2000, a typical Social Security recipient consumed only Food and Housing. The price of housing was $15/unit and the price of food was $5/unit. Denote the quantities of food and housing per month by F and H respectively. This consumer received $150/month and consumed five units of housing and 15 units of food. a. Write down the algebraic representation of this consumer's budget constraint. b. Show that the bundle (5,15) is just affordable. Identify another bundle on the budget constraint where both goods are consumed in positive amounts. Suppose that in 2004 the price of food rose to $10/unit and housing rose to $20/unit. c. How much additional income is required such that the original bundle is just affordable at the new prices. d. On the graph with Housing on the horizontal axis and food on the vertical axis, depict the original budget constraint and the new budget constraint after income is compensated according to c. Include the indifference curve going through the point (5,15). e. Is the consumer better, worse, or equally well off in 2004 relative to 2000 following the compensation? Explain. What will happen to the consumer's choice of food and housing consumption? How can you tell?

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Chapter1: Making Economics Decisions
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Social Security benefits are the only source of income for a large number of older
persons. As a result, efforts have been made to modify these payments in order to keep up
with evolving costs. This question will guide you through what is known as the "indexing"
Transcribed Image Text:Social Security benefits are the only source of income for a large number of older persons. As a result, efforts have been made to modify these payments in order to keep up with evolving costs. This question will guide you through what is known as the "indexing"
procedure.
Suppose that in the year 2000, a typical Social Security recipient consumed only Food and
Housing. The price of housing was $15/unit and the price of food was $5/unit. Denote the
quantities of food and housing per month by F and H respectively. This consumer received
$150/month and consumed five units of housing and 15 units of food.
a. Write down the algebraic representation of this consumer's budget constraint.
b. Show that the bundle (5,15) is just affordable. Identify another bundle on the budget
constraint where both goods are consumed in positive amounts. Suppose that in 2004
the price of food rose to $10/unit and housing rose to $20/unit.
c. How much additional income is required such that the original bundle is just
affordable at the new prices.
d. On the graph with Housing on the horizontal axis and food on the vertical axis, depict
the original budget constraint and the new budget constraint after income is
compensated according to c. Include the indifference curve going through the point
(5,15).
e. Is the consumer better, worse, or equally well off in 2004 relative to 2000 following the
compensation? Explain. What will happen to the consumer's choice of food and
housing consumption? How can you tell?
Transcribed Image Text:procedure. Suppose that in the year 2000, a typical Social Security recipient consumed only Food and Housing. The price of housing was $15/unit and the price of food was $5/unit. Denote the quantities of food and housing per month by F and H respectively. This consumer received $150/month and consumed five units of housing and 15 units of food. a. Write down the algebraic representation of this consumer's budget constraint. b. Show that the bundle (5,15) is just affordable. Identify another bundle on the budget constraint where both goods are consumed in positive amounts. Suppose that in 2004 the price of food rose to $10/unit and housing rose to $20/unit. c. How much additional income is required such that the original bundle is just affordable at the new prices. d. On the graph with Housing on the horizontal axis and food on the vertical axis, depict the original budget constraint and the new budget constraint after income is compensated according to c. Include the indifference curve going through the point (5,15). e. Is the consumer better, worse, or equally well off in 2004 relative to 2000 following the compensation? Explain. What will happen to the consumer's choice of food and housing consumption? How can you tell?
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