S. Klepper, Economics 73-100, Fall 2011

Solution to Quiz 2

If the consumer’s income increased by 75% and the price of food doubled, then the maximum amount of food the consumer could purchase must have been lower in 2000 than 1980. Alternatively, if the consumer’s income increased by 75% and the price of clothing increased by 75%, the maximum amount of clothing the consumer could purchase must have been the same in 2000 and 1980. This implies the following budget lines for the consumer in 1980 and 2000:

Since the 2000 budget line is inside the 1980 budget line, the consumer must have sustained an unequivocal fall in real income. Hence the consumer could not have been better off in 2000 than 1980. Furthermore, since the 2000 budget line lies inside the 1980 budget line, in 1980 the consumer could have afforded the combination of food and clothing chosen in 2000.

Based on this description, the answers to the individual questions are:

_____1. True

_____2. True

_____3. True

_____4. True

_____5. False