Does comparing the results of problems 28 and 29 lead you

Question

1. Assume a household allocates its $4,500 monthly income to food, housing, transportation, health care, and all other items. According to Table 1.2 in the text, allocation of a typical household's budget to housing is almost equal to the sum of its allocations to food, transportation, and health care. Allocation to all other items is twice as allocation to transportation plus $500. Allocation to transportation is equal to sum of allocations to food and health care. Finally, allocation to all other items is also equal to one half of allocation to food, plus the allocations to transportation and health care. If the unit price of food, housing, transportation, health care, and other items are $20, $50, $30, $15 and $35 respectively, determine the household optimal bundle.

2. In problem #27, assume that household's income decreases by 5 %. What is the household's new optimal bundle?

3. In problem #27, assume that due to inflation prices increase by 5 %. What is the new optimal bundle?

4.  Does comparing the results of problems #28 and #29 lead you to believe that inflation is similar to the loss of income?

Answer 1

Q1. Suppose that a household assigns its $4,500 monthly income to housing, food, transportation, health care and all other items. According to the table text, allocation of the typical household's budget to housing is almost equivalent to the sum of its allocations to food, transportation and health care. Allocation to all other items is two times as allocation to transportation plus $500. Allocation to transportation is equivalent to sum of allocations to food and health care. Lastly, allocation to all other items is as well equivalent to one half of allocation to food, plus the allocations to transportation and health care. Whenever the unit price of food, housing, transportation, health care and other items are $20, $50, $30, $15 and $35 correspondingly, find out the household optimal bundle. Q2. In above, suppose that household's income reduces by 5 %. Determine the household's latest optimal bundle? Show the all computation in a word document all along with the proper formula.