Recently, the Price of Lentils Increased

question 291

Multiple Choice

Recently, the price of lentils increased. As a result Lincoln residents noticed that their neighbor, Rasputin, decreased his consumption of lentils and of steak. Rasputin said his utility had declined. Many citizens made donations to the "Rasputin Relief Fund." Rasputin was given a cash grant equal to the amount he claimed to need to regain his initial utility level. Happy and thankful, Rasputin rushed off to the store to make his new purchases-consisting of more steak and slightly less lentils. Each graph above shows two indifference curves for Rasputin, I₁ and I₂, and the two budget constraints, B₁ and B₂, that he faced. Let E₁ represent Rasputin's initial equilibrium, E₂ equal his equilibrium following the increase in the price of lentils, and E₃ his equilibrium after receiving the cash from the relief fund. Which graph above is consistent with Rasputin's claims in the above story?

• A)graph A
• B)graph B
• C)graph C
• D)graph D

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Definitions:

Potential Output

The maximum amount of goods and services an economy can produce when it uses its resources fully and efficiently, without causing inflation.

Net Taxes

The total taxes paid to the government minus transfer payments and subsidies received from the government.

Aggregate Demand

The total quantity of goods and services demanded across all levels of an economy at a given price level and in a given time period.

Potential Output

The peak level of real GDP that can be maintained in the long run without causing inflation to rise.