Question

5. Problems and Applications Q5

Consider the effects of inflation in an economy composed of only two people: Lorenzo, a bean farmer, and Neha, a rice farmer. Lorenzo and Neha both always consume equal amounts of rice and beans. In 2016 the price of beans was $5, and the price of rice was $3.

Suppose that in 2017 the price of beans was $10 and the price of rice was $6.

Inflation was _____%

.

Indicate whether Lorenzo and Neha were better off, worse off, or unaffected by the changes in prices.

	Better Off	Worse Off	Unaffected
Lorenzo
Neha

Now suppose that in 2017 the price of beans was $7.50 and the price of rice was $6.

In this case, inflation was ______%

.

Indicate whether Lorenzo and Neha were better off, worse off, or unaffected by the changes in prices.

	Better Off	Worse Off	Unaffected
Lorenzo
Neha

Now suppose that in 2017, the price of beans was $1.50 and the price of rice was $6.

In this case, inflation was ______-%

.

Indicate whether Lorenzo and Neha were better off, worse off, or unaffected by the changes in prices.

	Better Off	Worse Off	Unaffected
Lorenzo
Neha

What matters more to Lorenzo and Neha?

A) The overall inflation rate

B) The relative price of rice and beans

Answer 1

Let assume both consume just one unit of beans and one unit of rice.

2016 basket price=5+3=8$

2017 basket price=10+6=16$

Inflation=16/8]*100-100=100%

They're worse off

2017 basket price=7.5+6=13.5$

Inflation=13.5/8]*100-100=68.75%

They are worse off

2017 basket price=1.5+6=7.5

Inflation=7.5/8]*100-100=-6.25%

They are better off.

Because they always consume both goods in Equal numbers ,so the relative price doesn't matter to them.

Overall inflation affect their purchasing power.so they are concern about inflation.