Assume that in your first job after graduating from college you live in a city where the price of food is PF and the price of housing is PH. You consume F1 of food and H1 of housing per year. Assume that you have strictly convex indifference curves and consume only these two goods. After two years living in this city, your company transfers you to a new city where the price of food is 50 percent higher and the price of housing is 20 percent higher.
a. Draw a graph that illustrates the information mentioned above.
b. Assume that your company increases your income by just enough for you to be able to continue to buy F1 and H1. Using both your graph and a written explanation describe why one could say that you are being over compensated by your company.
c. Using both your graph and a written explanation describe how you would determine the equivalent variation of your company’s compensation plan.