1. A.If the prices of all products are rising at 5 percent per year and your emp
ID: 1190650 • Letter: 1
Question
1.
A.If the prices of all products are rising at 5 percent per year and your employer gives you a 5 percent salary increase, are you better off, worse off, or equally well off in comparison with your situation a year ago? Use indifference curve analysis to explain your answer.
B. Instead, if the prices of all products are rising at 5 percent per year and your employer gives you a 10 percent salary increase, are you better off, worse off, or equally well off in comparison with your salary a year ago? Use indifference curve analysis to explain your answer.
Explanation / Answer
The indifference curve shows the combination of two goods that give the consumer equal satisfaction and utility.
Ans A – If the prices of product increase by the same percentage as the income there will be no difference in the consumption levels and the consumer will purchase the same quantity of consumption bundles as he was purchasing earlier, because even if the prices have increased there is an equal amount of increase in the income level to cater to it. Hence the consumer will be equally well off in comparison to the situation a year ago.
Ans B – If the income increase is double than the price increase than the consumption level will increase as the consumer will purchase more bundles with his increased income. Hence he will be better off.
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