Q1) A basket of goods for a given consumer includes two goods, X and Z. Consumer
ID: 1142024 • Letter: Q
Question
Q1) A basket of goods for a given consumer includes two goods, X and Z. Consumer income is equal to $1,500 and the prices of these two goods are as follows: Px- $50, Pz-$25, This consumer is consuming 10 uits 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%. The income required for the consumer to afford the same quantity of goods X and Z with the new prices is Q2) Using the information in the above question we know the rate of inflation is-%Explanation / Answer
The budget line is Px*X+Py*Y = i, Whe I represents income of the consumer, Px and Py are the prices of X and Y and X and Y are quantities purchased.
as per given information
50X+25Y = 1500, also we are given that 10 units of X are consumed
50*10 + 25*Y = 1500
25Y = 1000, Y = 40
The combination before change in price is 10,40
The price of X changes to 50*1.10 = 55.0
The price of Y changes to 25*0.9 = 22.5
If the same quantity is to be consumed we need
55*10+22.5*40 = 1450
The consumer would need 50 less than earlier, if price of X rises by 10% and Y fell by 10%
The rate of inflation is (1500/1450-1) = -3.33%
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