S. Klepper, Economics 73-100, Fall 2011
Consider Social Security recipients in the decade of 1990 to 2000. Suppose they consume two goods, food and clothing, and in both 1990 and 2000 they consumed a positive amount of both goods. Between 1990 and 2000 both the price of food and clothing increased, with the percentage increase in the price of food greater than the percentage increase in the price of clothing. Social Security payments were increased from 1990 to 2000 so that Social Security recipients had just enough income in 2000 to purchase the same combination of food and clothing in 2000 that they purchased in 1990. Assume that the preferences of Social Security recipients did not change between 1990 and 2000 and that (as always) Social Security recipients chose the combination of food and clothing 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.
HINT: Draw the budget lines of Social Security recipients in 1990 and 2000 on the same graph. Choose an arbitrary point on the 1990 budget line composed of a positive amount of both goods to denote the combination of food and clothing chosen in 1990. Where does the 2000 budget line lie relative to this consumption point and how does its slope compare to the 1990 budget line?
_____1. The maximum amount of food Social Security recipients could purchase was greater in 1990 than 2000.
_____2. The maximum amount of clothing Social Security recipients could purchase was greater in 1990 than 2000.
_____3. The budget line of Social Security recipients in 2000 crossed the budget line of Social Security recipients in 1990.
_____4. Social Security recipients must have been at least as well off in 2000 as 1990.
_____5. Social Security recipients purchased the same combination of food and clothing in 2000 as in 1990.