Answer to Question #170919 in Microeconomics for Soumyajit Halder

Question

Ms. A's income consists of Rs 1,00,000 per year from pension plus the earning from whatever she sells of the 2000kg of rice she harvests annually from her farm. She spends this income on rice(x) and on all other expenses (y) are measured in rupees, so that the price of y is Rs1. Last year rice was sold for Rs 20 per kg and Ms A's rice consumption was 2000kgs, just the amount produced on her farm. This year the price of rice Rs 30 per farm. A has standard convex preferences over rice and all other expenses . Answer the following two questions without referring to any utility function or indifference curves.

a) What will happen to her rice consumption this year- increase, decrease, or remain the same? Give a clear explanation for your answer.

b) Will she be better or worse off this year compared to last year? Explain clearly

Answer 1

a (i) Miss A's previous year rice consumption is equals to 2000 KG

Value of one KG rice is equals to Rs.20

value of 2000 KG rice is equals to Rs.20 into 2000 KG is equals to Rs.40,000

Miss A's current year and is also 2000 KG

therefore, value of one KG rice is equals to Rs.30

next year's value of 2000 KG rice is equals to Rs.30 x 2000 KG=Rs.60,000

Since Ms. A has standard convex preferences over rice and all other expenses therefore even if rice got Rs.20,000 more expensive her consumption will remain the same.

b (ii) She is worse off as compared to last year because she will have to pay Rs.20,000 more for the same quantity of rice that is 2000 KG

Cost of 2000 KG rice previously was equal to 2000× Rs.20 = Rs.40,000

Cost of 2000 KG rice currently is equals to 20,000 KG xRs.30= Rs.60,000 the difference is Rs.20,000.