Question

This question allows you to evaluate how to think about the welfare of consumers. Assume a consumer's welfare is driven by what he/she consumes. 1. Suppose there are only two types of goods to consume: food and leisure. An average Californian citizen has a daily income of $100. The price of one meal of food is $20 and the price (or value) of one unit of leisure is $10. An average citizen in Mississippi has a daily income of $50. The price of one unit of food is $10 and the price (or value) of one unit of leisure is $10. Who is more well-off in terms of the bundles of goods they can consume? (hint: draw budget sets.) 2. Suppose you earn $100 per day. One day your boss increases your income by 50% solely due to your high performance at work. Are you more well-off, worse-off, the same, or cannot answer compared to before the change? 3. Suppose the boss had lied to you. The reason why she increased your salary by 50% is because all other prices also increased by 50%. Are you more well-off, worse-off, the same, or cannot answer compared to before the change? 4.Suppose you are a big fan of Japanese food and Chinese food and those are the only two goods you consume. Suppose your income does not change and the price of Japanese food decreases However, the price of Chinese food increases. Are you more well-off, worse-off, the same, or cannot answer compared to before the changes in prices?

Answer 1

Solution:

1.

missisip California 20 25 30 15 Leisure 10 Since,budget set for califomia is above that for missisipi, people in california are more well off

2.

10 15 20 25 30 The consu mer is well of f after increase in income as she is on higher budget set.

3. The consumer will be the same after change in income as price increases in the same proportion.

4.

Before the change After the change 10 15 20 25 30 Japanese food This is uncertain to say the consumer will be well off or not after the price change