Homework assignment

Suppose Nick's salary is tied to an inflation index based on the average prices of food and clothing, with equal weights on each. This year the index (and thus Nick's salary ) increased by 4%. Determine the effect on Nick's optimal consumption bundle and welfare if the following occur . The prices of both food and clothing increased by 4% b. The price of food increased by more than the price of clothing, and Nick spent most of his salary on food c. The price of food increased by more than the price of clothing, and Nick spent most of his salary on clothing