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Assume that the price of food is $5 and the price of clothing is $10. A consumer with a wealth of $200 presently buys 20 units of food and 10 units of clothing. As a result of inflation, the price of food goes up to $10 and the price of clothing goes up to $15, while the wealth of the consumer increases to $350.

a. Does the consumer pick a different bundle after these changes? If the bundle is different, how is it different? (It may help you to graph this problem out carefully, but it is not required for the answer).

b. Is the consumer better or worse off?

Microeconomics, Economics

  • Category:- Microeconomics
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