Change Figure 5.5 so that L²is steeper than L¹(but still goes through e₁); that is, food increases by more than clothing in the second year. Show the conclusion that Klaas is still better off after receiving a CPI adjustment. Explain the logic behind the following statement: €œThe analysis holds as long as the relative prices differ over the two years. Whether both prices, one price, or neither price is higher in the first year than in the second year is irrelevant to the analysis.€

Figure 5.5

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Y,/Pc C2 L' Y/PE F, F2 F. Units of food per year C, Units of clothing per year