Question

Suppose that the price of food increases by 2%, the price of clothing increases by 4%, and food and clothing each account for half of expenditures; therefore, the overall inflation rate is 3%. A 3% increase in income is necessary to achieve the same level of utility.true/false

Answer 1

True

Step-by-step explanation:

Since the overall inflation is 3%, a rise in income of 3% is necessary to balance off the rise in inflation.