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Budget Constraint 4

# Budget Constraint 4 - As long as their M v x was less...

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Jerry Imel Economics 301-2 Intermediate Moment #4 02/01/2011 The typical consumer had a cost of living increase equal to 8.5% (\$850). This was calculated by the following method: = = 8.5% Using the same method, The consumer who apportioned her income between X and Y equal to 20 and 80 percent, saw a cost of living increase equal to 9%. The consumer who apportioned her income between X and Y equal to 50 and 50 percent, saw a cost of living increase equal to 7.5%. If all three consumers had their income raised equal to 8.5% (consumers cost of living), they would all be able to purchase more X, as its cost went from 1 x = 1 y to 1 x = .95 y.
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Unformatted text preview: As long as their M v x was less than .95y, they would purchase more x, and move away from their original bundle price, in essence they would be “better off”. The consumer who apportioned her income 50/50 between X and Y will gain, as her cost of living only went up by \$750, but she was compensated for \$850. The typical consumer would break even, and the person who apportioned 20x and 80y, would lose, since she lost \$900 to inflation and she was only compensated for \$850....
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