Question

Sarah works for a firm that automatically adjusts her wages to the annual rate of inflation. Bob works for a firm that grants its employees a 5% annual income increase. Milt is retired and receives two payments: a pension payment that is fixed at $2,000 per month and a Social Security payment of $1,000 per month. The Social Security payment is indexed to the inflation rate in the community.

Question 1a: what inflation rate would make sarag better off?

1b: what inflation rate would make bob better off

1c: what inflation rate would make Milt better off

Answer 1

1a.Sarah's wages are adjusted to inflation,due to the adustment any inflation rate would not make him better or worse off

1b. Inflation rate of below 5% would make him better off because if inflation rate is above 5% , purchasing power of his wage will decrease as wages will have an annula increment of 5%

1c. Milt gets a fixed pension of $2000 per month and also inflation adjusted social security of 1000$. He is worse off in any situation because he gets $2000 without indexing to inflation and hence if inflation is positive his purchasing power of $2000 is decreased and 1000$ is not affected by inflation.