1. An employer decides to transfer one of her executives to Europe. “Don’t worry,” she says, “I will increase your salary so that you can afford exactly the same things in your new home city as you can buy here.” Is this the right salary adjustment? In driving to work one day, one of the authors of this text heard the following advertisement for a local grocery store, which we will call Harry’s Food.

“Harry’s has the best prices in town, and we can prove it! Yesterday, we chose Mr. Smith out of our checkout line for a comparison test. Mr. Smith is an average consumer, much like you and me. In doing his weekly grocery shopping yesterday at Harry’s, he spent $125. We then sent Mr. Smith to the neighboring competitor with instructions to buy the same market basket of food. When he returned with his food, he saw that his grocery total was $134. You too will see that Harry’s can save you money!”