Consider the effects of inflation in an economy composed of only two people: Hubert, a bean farmer, and Kate, a rice farmer. Hubert and Kate both always consume equal amounts of rice and beans. In 2016 the price of beans was $1, and the price of rice was $4. Suppose that in 2017 the price of beans was $2 and the price of rice was $8. Inflation was % . Indicate whether Hubert and Kate were better off, worse off, or unaffected by the changes in prices. Better Off Worse Off Unaffected Hubert Kate Now suppose that in 2017 the price of beans was $2 and the price of rice was $4.80. In this case, inflation was % . Indicate whether Hubert and Kate were better off, worse off, or unaffected by the changes in prices. Better Off Worse Off Unaffected Hubert Kate Now suppose that in 2017, the price of beans was $2 and the price of rice was $1.60. In this case, inflation was % . Indicate whether Hubert and Kate were better off, worse off, or unaffected by the changes in prices. Better Off Worse Off Unaffected
Hubert
Kate
What matters more to Hubert and Kate?
The overall inflation rate
The relative price of rice and beans

a.

Inflation will be the percentage by which prices have risen in the economy.

It can be calculated by using a market basket that would comprise the two goods. In 2016 therefore, the price of this basket is $5 = 1 + 4. In 2017 the price would have increased to $10.

Inflation = (10 - 5) / 5 = 100%

Both Hubert and Kate would be unaffected by the changes in prices because the prices doubled for both of them.

b. Now suppose that in 2017 the price of beans was $2 and the price of rice was $4.80.

Market basket in 2017 = 2 + 4.8 = $6.80

Inflation = (6.8 - 5) / 5 = 36%

Hubert will be better off because the price of beans increased by 100% which is more than the inflation rate of 36%.

Kate's price increase = (4.8 - 4)/4 = 20%. Yet inflation is 36%. Kate will therefore be worse off as inflation is higher than the increase in what she sells.

c. Now suppose that in 2017, the price of beans was $2 and the price of rice was $1.60.

Market Basket in 2017 = 2 + 1.6 = $3.60

Inflation = (3.6 - 5)/5 = -28%

Hubert will be better off because his prices have risen while general inflation has fallen.

Kate's price decrease = ( 1.6 - 4)/4 = -60%. Inflation was -28%. Kate will therefore be worse off because inflation decreased less than her prices did.

d. The relative price of rice and beans matter more to them because if the goods rise in prices significantly enough, they would be better off even if there was inflation.

answer; i do believe that the correct answer is ; ///are valued more highly than their cost;