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.
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Chapter 3 Solutions
EBK INTERMEDIATE MICROECONOMICS AND ITS
- Julie buys food and other goods. She has an income of $400 per month. The price of food is initially $1.00 per unit. It then rises to $1.20 per unit. The prices of other goods do not change. To help Julie out, her mother offers to send her a check each month to supplement her income. Julie tells her mother, “Thanks, Mom. If you would send me a check for $50 per month, I would be exactly as happy paying $1.20 per unit as I would have been paying $1.00 per unit and not receiving the $50 from you.” Which of the following statements is true? Explain. The increased price of food has:a) an income effect of +$50 per monthb) an income effect of -$50 per month c) a compensating variation of +$50 per monthd) a compensating variation of -$50 per monthe) an equivalent variation of +$50 per monthf ) an equivalent variation of -$50 per montharrow_forwardMelanie has an income of $140 which she can spend on tea at $8 per cup or used clothes at $20 per clothing. What is Melanie’s budget line if her income and all prices increase by 20%?arrow_forwardJim has made his best affordable choice of muffins and coffee. He spends all of his income on 10 muffins at $1 each and 20 cups of coffee at $2 each. Muffins and coffee are ordinary goods. Now, the price of a muffin rises to $1.50 and the price of coffee falls to $1.75 a cup. Will Jim now be able and want to buy 10 muffins and 20 coffees? Which situation does Jim prefer: muffins at $1 and coffee at $2 a cup or muffins at $1.50 and coffee at $1.75 a cup? When the price of a muffin rises to $1.50 and the price of coffee falls to $1.75 a cup, Jim able to buy 10 muffins and 20 coffees. Jim O A. is; does not buy this combination because the marginal rate of substitution has changed. B. is; buys this combination because the marginal rate of substitution has not changed. O C. is not; does not buy this combination because with the change in price he can no longer buy 2 cups of coffee to drink with each muffin O D. is not; does not buy this combination because he can't afford it Jim prefers to…arrow_forward
- betsy graduates from college and her income increases by $40,000. nothing else changes. betsy decreases the quantity of T-shirts and potato chips that she buys and increases the quantity of hot caramel cider that she buys. for betsy,arrow_forwardDetermine how much of each good Mara will consume if she has $20 and if the price of books is $10 and the price of coffee is $3.arrow_forwardDoes the income level of a person change their view of substitute goods?arrow_forward
- 34) Consider Dianna who has a $25 fast food budget per month. She can purchase salads (S), hamburgers (H), or chicken strips (C). The price of a salad is Ps=$3, the price of a hamburger is PB-$2 and the price of chicken strips is Pc $4. Fill in the table below. You will use your solutions to answer questions 34-36. # Hamburgers # Salads 1 2 2 MU Salads 36 30 c) 4; 3; 4 d) 5; 4; 5 MU/P Salads 1 2 3 4 5 MU hamburgers 5 In the optimal consumption bundle for Dianna, she will purchase chicken strips. a) 2; 1; 2 b) 3; 2; 3 28 22 16 36) Dianna total utility from her consumption bundle is a) 126 b) 504 c) 106 d) 398 MU/P # Hamburgers Chicken Strips T 2 3 7 salads, 4 5 35) Dianna's utility is maximized where the marginal utility per dollar spent on each item is equal to a) $10 b) $12 c) $14 d) $16 MU Chicken Strips 72 64 56 48 40 hamburgers, and MU/P Chicken Stripsarrow_forwardCan you determine the income effect of the price increase? If yes, how much is it? If not, why not?arrow_forwardA basket of goods for a given consumer includes two goods, X and Z. Consumer income is equal to $1,500 and the prices of these two goods are as follows: P= $20 P, = $25 This consumer is consuming 10 units of good X. Suppose that over the course of a year, the price of good X changes by 10% and the price of good Z changes by - 10%. How much income would be required for the consumer to afford the same quantity of goods X and Z with the new prices? Sarrow_forward
- A basket of goods for a given consumer includes two goods, X and Z. Consumer income is equal to $1,500 and the prices of these two goods are as follows: Px = $25 Pz = $25 This consumer is consuming10 units of good X. Suppose that over the course of a year, the price of good X changes by 10% and the price of good Z changes by −10%. How much income would be required for the consumer to afford the same quantity of goods X and Z with the new prices? $______arrow_forwardIf a consumer's income decreases, what will happen to the budget line? It will shift outward. It will become steeper. It will become flatter. It will shift inward.arrow_forwardWhen economists speak of preferences as influencing demand, they are referring toA) the availability of a good to all income classes.B) directly observable changes in prices and income.C) the excess of wants over the available supplies.D) an individual's attitudes toward goods and services.arrow_forward
