Problem 3: Popeye is retired and his only income is his sailor’s pension of $200 per month, which he spends exclusively on spinach and sodas.

Problem 3:

Popeye is retired and his only income is his sailor’s pension of $200 per month, which he spends exclusively on spinach and sodas. For the past several years when spinach cost $5 per bushel and sodas were $10 per case, he spent his entire income on 10 bushels of spinach and 15 cases of soda each month. This year due to a severe drought and higher transportation costs the price of spinach rose dramatically to $15 per bushel and the price of sodas increased to $15 per case. Popeye was shocked and appealed to the pension board for help given the price increases. The board, noting Popeye’s many years of good service, raised his monthly pension to $375. Popeye has the usual convex shaped indifference curves for these two goods. Hint: A carefully drawn standard indifference curve graph makes this easy.

a.      Will Popeye be able to afford the lifestyle he is accustomed too (i.e., his usual consumption pattern)?

b.     Will Popeye change the amount of spinach and sodas he buys this year? If so, explain how and why.

c.  Will Popeye be better off, as well off, or worse off than last year? Why?

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