Suppose That the Price of Gasoline Has Risen by 50

question 10

Essay

Suppose that the price of gasoline has risen by 50%. What happens to a consumer's level of well-being given he spends some of his income on gasoline? Diagram the impact of the increase in gas prices in a commodity space diagram, and show the relevant indifference curves.
Now, if the individual's income rises just enough so that his original consumption bundle exactly exhausts his income, will the individual purchase more or less gasoline (this level of income implies the consumer can afford his original consumption bundle)? Is the individual better-off at the higher price level of gasoline with the higher income level or the original price of gas and income?

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Definitions:

Balance Sheet

An accounting statement that itemizes the total assets, liabilities, and equity of shareholders at a defined date.

Accounts Payable

Liabilities owed by a business to its suppliers or vendors for goods and services purchased on credit.

Net Income

The earnings a company retains following the deduction of all costs and taxes from its revenue.

Rent Expense

The cost incurred by a business to use property or equipment for business purposes.