Chapter 3, Problem 1RQ

A

To determine

To discuss: The welfare when the prices of food and housing increase by 50%, with income remaining constant.

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 price changes of the goods and services.

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 determine

To discuss: The welfare when prices of food and housing, along with the income of the individual were increased by 50%.

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 determine

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%.

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 determine

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%.

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 determine

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.

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.