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1. Suppose that due to ination, the price of all goods goes up uniformly by 12%, but income stays the same. The consumption of some
1. Suppose that due to ination, the price of all goods goes up uniformly by 12%, but income stays the same. The consumption of some goods goes up, and of some goods goes down. Claim: \"The goods whose consumption increased are Giffen goods\". Is this wrong/ right and why? 2. A young family buys two categories of consumption goods: housing and other consumption goods. The indifference curves of this family are standard in every sense discussed on the lectures; in particular, they are smooth. Suppose that the price of a standard square meter is 2,000 and the family expects that this price will stay constant. The price of the other goods is one,1 and the lifetime income of the young family is 500,000. The family decides that the optimal size of the house is 100 square meters. The market is exible and the family can resale the house and purchase another one at no transaction costs. After the house is purchased, the market price of a standard square meter goes down to 1,000. The family is shocked, because their brand new house that they purchased for 200,000 has lost half of its value overnight. Claim: \"The family is worse off\". There is a sense in which this is a correct statement, but there is a sense in which this is incorrect. Explain the latter
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