Suppose that Alexs firm wants to transfer him from its Seattle office to its London branch, where he will face different prices and a different cost of living. Alex, who doesn't care about where he lives, spends his money on housing and entertainment. Like most firms, his employer will pay him an after-tax salary in British pounds such that he can buy the same bundle of goods in London that he is currently buying in Seattle. A The figure to the right shows Alex maximizing utility in Seattle along budget line L' at Bundle A. Suppose that entertainment is relatively more expensive than housing in London compared to Seattle. Show that Alex is better off after his move.

1.) Use the line drawing tool to draw new budget line for Alex that allows him to purchase Bundle A in London (at London prices). Label this line 'L2.

2.) Use the three-point curved line drawing tool to draw a new indifference curve that indicates his maximized level of utility in London. Label this line 12 Entertainment per year 21

3.) Use the point drawing tool to indicate the bundle that maximizes utility for Alex in London along his new budget line. Label this point 'B'. H1 Carefully follow the instructions above and only draw the required objects. Housing per year Explain the logic behind the following statement: "The analysis holds as long as the relative prices differ in the two cities. Whether both prices, one price, or neither price in London is higher than in Seattle is irrelevant to the analysis." Alex is better off after his move as long as relative prices differ because

A. he can substitute toward the relatively cheaper good.

B. all price changes will be nominal, with no real changes.

c. his employer gives him additional income until he is equally well off.

D. he cannot continue to consume Bundle A.

E. the new budget constraint will be further from the origin than the original budget constraint.