Reference no: EM13878148
A household allocates its $5,000 monthly income to the purchase of necessity and luxury goods. The average price of necessities is $25 per unit and that of luxuries is $125 per unit.
(a) Write the household budget constraint.
(b) Determine the household equilibrium bundle if the household's allocation of its monthly budget to luxuries is 3 times that of its budget allocation for necessities.
(c) What is the equation of household income-consumption path?
(d) Assume the household's income declines by 10 % and the household decides to reduce its allocation to luxuries by 10 %. What is the household's new bundle?
(e) Assume no loss of income but an inflation rate of 10 %. What is the house- hold's new bundle if the household decides to cut its budget allocation to luxuries by 10 % ?
(f) Compare your answers in parts (d) and (e).
(g) Assume the original household income increases by 10 % to $5,500 and the household decides to increase its allocation to luxuries by 10 %. What is the household's new bundle?
(h) Assume no change in income but the price level declines by 10 %. What is the household's new bundle?
(i) Compare your answers in parts (g) and (h).
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