A consumer initially spends 60% of his income on food. The price of food rises by 20%. At the same time, the individual is compensated by income increase of 12%. Therefore individual must be worse off. True or false,explain

Question

anonymous · Answer

LET INCOME= 100 & PRICE OF FOOD=10
EXPENDITURE ON FOOD=60 which means UNITS OF FOOD=60/10=6
AFTER PRICE INCREASE N COMPENSATION, PRICE OF FOOD=12
COMPENSATED INCOME= 112
NOW,units of food= 112/12=9.33
THUS, INDVL WIL B BETTER OFF as he is able to get more units of food now