Question
Felix chooses between clothing, q1, and food, q2. His initial income is $3,000 a month, p1 = 300, and p2 = 30. At his initial
Felix chooses between clothing, q1, and food, q2. His initial income is $3,000 a month, p1 = 300, and p2 = 30. At his initial bundle, he consumes q1 = 2 and q2 = 80. Later, his income rises to $3,600 and the price of clothing rises to p1 = $600, but the price of food does not change (p2 = 30). As a result, he reduces his consumption of clothing to q1 = 1. Using a revealed preference reasoning, can you determine how he ranks the two bundles? (I tried out A, but got it wrong. I think it's either between C and D).
A. Felix is indifferent between his initial bundle and his new bundle.
B. Felix prefers his initial bundle.
C. Felix may prefer his initial bundle or he may be indifferent between them.
D. Felix prefers his new bundle.
E. Insufficient information exists to determine which bundle Felix prefers.
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