Suppose That a Consumer's Increase in Nominal Income from the Base

question 109

Essay

Suppose that a consumer's increase in nominal income from the base year is exceeded by the inflation level given by a Paasche cost of living index for their level of purchases Show that this information implies that the consumer is strictly worse-off as compared to the base year.(HINT: Use a revealed preference argument)

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Definitions:

Clever Hans

Clever Hans was a horse that was claimed to be able to perform arithmetic and other intellectual tasks, later found to be responding to subtle cues from his handler.

Arithmetic

The branch of mathematics dealing with the properties and manipulation of numbers, including operations like addition, subtraction, multiplication, and division.

Cues

Signals or stimuli that cause a response or direct attention, used in various contexts including psychology, communication, and behavior analysis.

ESP

Extrasensory perception, a claimed ability to gain information through means other than the known human senses.