Suppose that p_x= 2 and p_y= 5. Jane spends her $100 income on 25 units of x and 10 units of y. When the price of x doubled to $10 per unit, Jane's father gave her an extra $50 so that she could buy the same bundle that she did before the price change. Assuming convex indifference curves, which of the following statements is true? A)No conclusions can be drawn regarding Jill's welfare unless we know her utility function B)Jill is just as well off as before the price change C)Jill is actually better off now than she was before D)Jill is worse off now than she was before

Question

Quizplus · Accepted Answer

Before the price change, Jane was spending $250 (25 units of x at $4/unit and 10 units of y at $5/unit) and had $50 left over. After the price change, Jane needs to spend $250 again to purchase the same bundle (25 units of x at $10/unit and 10 units of y at $5/unit). Her father gave her an extra $50, which means that she has $100 to spend on x at the new price. With $100, Jane can buy 10 units of x (since the new price is $10/unit). Therefore, Jane is now purchasing 35 units of the bundle (10 units of y and 25 units of x) with the same amount of money she had before. Since the utility function is assumed to be convex, more of both goods always leads to higher utility. Therefore, Jane is better off now than she was before.

Suppose That Px = 2 and Py = 5

Suppose That P_x= 2 and P_y= 5