Answer to Question #144186 in Microeconomics for kelsey

Question

true or false, Suppose a household faces an increase in the price of food and the government responds by transferring to the household enough extra income that it could purchase its original bundle of “food” and “other goods”. Under these circumstances, the household will choose to purchase its original bundle.

Answer 1

True

This can be justified as follows;

After the price of the food has been increased, the purchasing power of the consumer is reduced by the factor of increase in the price of the good, i.e, he can afford lesser quantities of the food after price increase. His ability to purchase 'other goods' remain the same. Now the government transfers enough funds to the consumer so that he can afford the original bundle of goods. His preference has remained unchanged, his preference isn't affected by the change in price of the food. The fact that he chose the original bundle is that he prefers it to the rest of other affordable bundles. Thus he continues to choose the original bundle.