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

question 66

Essay

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

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Definitions:

Income Effect

How an individual's or economic income shift influences the demand for goods or services.

Substitution Effect

The substitution effect describes the change in consumption patterns due to a change in the relative prices of goods, leading consumers to substitute one good for another.

Higher Wage

The increased remuneration or salary received by an employee, often as a result of promotions, market adjustments, or successful salary negotiations.

Labor for Leisure

The trade-off between working hours for income and spending time on relaxation or enjoyment activities.