Question

Suppose that​ Alexx's 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. ​ Alexx, 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.

The figure to the right shows Alexx maximizing utility in Seattle along budget line L1 at Bundle A.

Suppose that entertainment is relatively more expensive than housing in London compared to Seattle. Show that Alexx is better off after his move.

​1.) Use the line drawing tool to draw a new budget line for Alexx 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 ​'I 2​'. ​

3.) Use the point drawing tool to indicate the bundle that maximizes utility for Alexx in London along his new budget line. Label this point​ 'B'.

Carefully follow the instructions above and only draw the required objects.  

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."

Alexx is better off after his move as long as relative prices differ because

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

B. he can substitute toward the relatively cheaper good.

C. the new budget contraint will be further from the origin than the original budget contraint.

D. he cannot continue to consume Bundle A.

E. all price changes will be​ nominal, with no real changes.

Answer 1