A farmer gets 20 eggs and 10 tomatoes every week from her chickens and her tomato plants.She has no other source of income.She has convex, downward-sloping indifference curves.The current market prices are $2 per egg and $3 per tomato.At these prices she chooses the same bundle that she is endowed with (20 eggs and 10 tomatoes).
A)If relative prices change in any way whatsoever, she will certainly be no worse off and may be better off than she was before the price change.
B)An increase in the price of eggs (with the price of tomatoes remaining constant)will decrease her utility.
C)An increase in the price of tomatoes (with the price of eggs remaining constant)will make her worse off.
D)If both prices rise, she will be worse off, but if only one price rises, she might be made better off or worse off, depending on her tastes.
E)Since she earns her income from tomatoes and eggs only, she treats eggs and tomatoes as perfect substitutes.

Question

Quizplus · Accepted Answer

Since the farmer chooses the bundle of 20 eggs and 10 tomatoes at the current market prices, it means that this bundle gives her the maximum possible utility given her preferences. Any change in relative prices will lead to the farmer choosing a different bundle, but since she has convex, downward-sloping indifference curves, it is certain that she can always find a bundle that is at least as good as the original bundle. Therefore, the farmer will certainly not be worse off and may be better off than she was before the price change.

A Farmer Gets 20 Eggs and 10 Tomatoes Every Week