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?