A group of people is offered two scenarios and asked which they would prefer: (A) a 3 percent wage decrease in a world with no inflation, or (B) a 3 percent wage increase in a world with 6 percent inflation.
a. What is the increase or decrease in the real wage in option A? What about in option B?
b. Knowing what you know about framing and loss aversion, which option do you expect more people to prefer?
c. In light of your answer to b, if you were an employer trying to cut real labor costs, would you prefer to have some inflation or no inflation in the economy?