S.
Klepper, Economics 73-100, Fall 2009
Consider
Social Security recipients in the period 1960 to 1990. Suppose all recipients consume positive
amounts of two goods, food and shelter, in all periods. Between 1960 and 1990 the prices of both food
and shelter increased, with the percentage increase in the price of food
greater than the percentage increase in the price of shelter. Suppose Social Security payments are indexed
to the price of food, which means that they are changed on a percentage basis
by the percentage change in the price of food.
Thus, between 1960 and 1990 the percentage increase in the payments to
Social Security recipients equaled the percentage increase in the price of
food. Assume that the preferences of
Social Security recipients did not change between 1960 and 1990 and, as always,
that Social Security recipients chose the combination of food and shelter in
both years that maximized their utility.
Which
of the following statements concerning this situation are correct? Mark true for a correct answer and false for
an incorrect one and provide explanations for each of your answers.
_____1. The maximum amount of shelter that Social Security recipients could have purchased in 1990 was greater than the maximum amount of shelter they could have purchased in 1960.
_____2. All Social Security recipients experienced an increase in their real income between 1960 and 1990.
_____3. All Social Security recipients could have afforded in 1990 the bundle of food and shelter they purchased in 1960.
_____4. All Social Security recipients consumed more shelter and less food in 1990 than 1960.
_____5. All Social Security recipients were better off in 1990 than 1960 regardless of the bundle of food and shelter they purchased in 1960.