Question

A basket of goods for a given consumer includes two goods, X and Z. Consumer income is equal to $1,000 and the prices of these two goods are as follows: Px = $20 P2 = $50 This consumer is consuming 10 units of good X. Suppose that over the course of a year, the price of good X changes by - 10% and the price of good Z changes by 10%. How much income would be required for the consumer to afford the same quantity of goods X and Z with the new prices? $

Answer 1

In the given problem ------

Px=20$

Py=50$

Income= 1000$

As consumer consumes 10 units of good X, the quantity of good Y will be 16 units .

So ,existing consumption bundle of X&Y is 10 & 16

Now ,if Px decreases by 10% and Py increases by 10%------

Px= 18$,Py=55$

18×10+55×16=1060

The income level required to maintain same bundle =$1060

*RaTe of inflation is 6%{ ( 1060-1000)/1000}×100}

*No, the consumer can not afford same bundle of goods with the original income level ,with new prices.