Reference no: EM13878144

Assume a 5-member household with a monthly income of $6,000. This household allocates its income to the purchasing of food and nonfood products. If the average price of food products is $30 per unit and nonfood items cost $120 per unit

(a) Write the households budget equation.

(b) If this household purchases 100 units of food products each month, how many units of nonfood items it can buy?

(c) Assume that the household's allocation of its monthly budget to nonfood products is 5 times that of its budget allocation for food. What is this house- hold optimal bundle? [Note that here the assumption is not that the household consumption of nonfood products is 5 times of that of food products, but rather the allocation of household income to nonfood items is 5 times of its allocation to food products].

(d) Assume the price of food products increases to $35 per unit. Write the house- hold's new budget equation. If this household wants to purchase food and nonfood items in the same proportion as in part (c), what is the household's new bundle?

(e) Assume the price of food products increases to $35 per unit. If this household wants to maintain its allocation of budget to purchase of food and nonfood

Table 1.2 Percent distribution of total annual expenditures by major category for all consumer units, Consumer Expenditure Survey, 2008-2011

Spending category	2008	2009	2010	2011
Average annual expenditures	100.00	100.0	100.0	100.0
Food	12.8	13.0	12.7	13.0
Food at home	7.4	7.6	7.5	7.7
Food away from home	5.3	5.3	5.2	5.3
Alcoholic beverages	0.9	0.9	0.9	0.9
Housing	33.9	34.4	34.4	33.8
Shelter	20.2	20.5	20.4	19.8
Utilities, fuels, and public services	7.2	7.4	7.6	7.5
Household operations	2.0	2.1	2.1	2.3
Housekeeping supplies	1.3	1.3	1.3	1.2
Household furnishings and equipment	3.2	3.1	3.0	3.0
Apparel and services	3.6	3.5	3.5	3.5
Transportation	17.0	15.6	16.0	16.7
Vehicle purchases (net outlay)	5.5	5.4	5.4	5.4
Gasoline and motor oil	5.4	4.0	4.4	5.3
Other vehicle expenses	5.2	5.2	5.1	4.9
Public transportation	1.0	1.0	1.0	1.0
Healthcare	5.9	6.4	6.6	6.7
Entertainment	5.6	5.5	5.2	5.2
Personal care products and services	1.2	1.2	1.2	1.3
Reading	0.2	0.2	0.2	0.2
Education	2.1	2.2	2.2	2.1
Tobacco products and smoking supplies	0.6	0.8	0.8	0.7
Miscellaneous	1.7	1.7	1.8	1.6
Cash contributions	3.4	3.5	3.4	3.5
Personal insurance and pensions	11.1	11.2	11.2	10.9
Life and other personal insurance	0.6	0.6	0.7	0.6
Pensions and social security	10.5	10.5	10.5	10.3

Source U.S Bureau of Labor Statistics

items in the same proportion as in part (c), what is the household's new bundle?