Question

Becky and Bob consume clothes and food only. They have the same utility functions and the same amount of income. Becky pays a higher price for her clothing relative to Bob. They pay the same price for food. You observe Becky and Bob choose different optimal bundles of clothes and food. What is true about this situation?

A. Becky and Bob obtain the same utility since they have the same amount of income.

B.Becky’s real income is lower.

C. Either Becky or Bob is not optimizing because they have chosen different bundles

D.Because their chosen bundles are different, they must have different preferences.

E. None of the above.

Answer 1

The answer is (B) . Becky’s real income is lower.

Real income takes into account the effect of prices. Since both Becky and Bb have the same nominal income and the same price for food. but Becky pays a higher price for clothes, the number of units of clothes that Becky can purchase is lower than Bob's. Thus, Becky has a lower real income than Bob.

All other options are incorrect as once the prices they face are different, Becky and Bob will consume different bundles even with the same prefrence,