14. Inflation increases the prices of all goods by 20%. At the same time, Ina’s income increases from $50,000 to $55,000. Compare the situation after both of these changes have happened with the situation before any of these changes have happened.
a. After these changes, has Ina’s budget line become steeper, less steep, or equally as steep compared to before?
b. After these changes, has Ina’s budget line shifted outward, inward, or not at all, compared to before?
Thank you for using the Jiskha Homework Help Forum. If inflation has increased everything by 20% and Ina's income has only increased 10%, she's still behind the times! Her budget will never stretch to cover the increased costs.
Sra
To compare the situation before and after the changes, we need to consider the effects of both inflation and the increase in Ina's income. Let's break it down step by step:
a. To determine whether Ina's budget line has become steeper, less steep, or equally as steep compared to before, we need to understand what a budget line represents. A budget line shows all the possible combinations of goods or services that can be purchased with a given budget.
In this case, the increase in prices due to inflation means that the purchasing power of Ina's income has decreased. The prices of all goods and services have increased by 20%, so Ina can buy less with the same amount of money.
However, the increase in Ina's income from $50,000 to $55,000 also needs to be considered. This increase gives Ina more purchasing power, allowing her to buy more goods and services.
Now, to answer the question, we need to compare the effects of both inflation and the increase in income. If the increase in income is greater than the increase in prices, Ina's budget line will become steeper since she can still afford a larger quantity of goods and services. On the other hand, if the increase in prices is greater than the increase in income, her budget line will become less steep as she can afford a smaller quantity of goods and services.
Since we know that Ina's income has increased by $5,000 and inflation has increased prices by 20%, we can calculate the impact of both changes on Ina's budget line.
Income increase: $55,000 - $50,000 = $5,000
Price increase due to inflation: 20% of $50,000 = $10,000
As $5,000 is less than $10,000, the increase in prices has a greater impact on Ina's budget line. Therefore, after these changes, Ina's budget line becomes less steep compared to before.
b. To determine whether Ina's budget line has shifted outward, inward, or not at all, we need to consider the overall impact of inflation and the increase in income on her purchasing power.
If the increase in income is greater than the increase in prices, Ina's budget line will shift outward since she can now afford a higher quantity of goods and services. Conversely, if the increase in prices is greater than the increase in income, her budget line will shift inward as she can afford a lower quantity of goods and services.
Given that the increase in income is $5,000 and the increase in prices is $10,000, the increase in prices has a larger impact. Ina's purchasing power has decreased due to inflation, resulting in her ability to purchase fewer goods and services. Therefore, after these changes, her budget line shifts inward compared to before.