Income Effect

An individual's income increases, while the prices of all goods they consume remain constant. Even if this individual chooses to purchase the exact same combination of goods as before the income increase, why can we conclude their overall well-being has improved?

Evaluating Well-being Based on Available Choices

Comparing Welfare with Different Opportunity Sets

An individual receives a significant, unexpected inheritance, which increases their non-labor income. If this individual chooses to continue working the same number of hours and consuming the exact same bundle of goods as before the inheritance, it can be concluded that their overall well-being has not improved.

A consumer initially chooses to purchase a specific combination of goods. Subsequently, their income and the prices of the goods change in such a way that their original combination of goods is no longer affordable. Assuming their preferences have not changed, what can be concluded about the consumer's well-being?

Comparing Welfare-Enhancing Policies

A government is considering two different programs to assist a household, both of which have the same monetary value. Program A provides the household with a $500 cash payment. Program B provides the household with a $500 voucher that can only be spent on food. Assuming the household would normally spend some, but less than $500, of its own money on food, which statement correctly compares the potential impact of these two programs on the household's well-being?

An individual's preferences are assumed to be constant. Match each economic scenario with the most accurate conclusion about the change in the individual's set of affordable choices and their resulting well-being.

Evaluating Welfare After a Price Change

Welfare Change with a Rotated Budget Constraint

An individual receives a significant, unexpected inheritance, which increases their non-labor income. If this individual chooses to continue working the same number of hours and consuming the exact same bundle of goods as before the inheritance, it can be concluded that their overall well-being has not improved.