question 5 ! Quantity ot x urant meals and hsing 4 Restaurant meals and housing

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question 5 !

Quantity ot x urant meals and hsing 4 Restaurant meals and housing ber of roomsi are the only two p bel She has an income of $1000, and the prie oods thatN iom is $100. The relative price o room is sS room isant meals is 5. How many restaurami mesl tauran she buy if she spends all her money on them Answer the following questions based on tions ()Inflation increases the pricesof all (2) Ina's income increases from $50 000 to 55s 000 a. Has Ina's budget line become steeper, less usap. i gooda equally as steep? b. Has Ina's budget line shifted outward, inward not at all? 6. Kory has an income of $50, which she can spen roods: CDs and cups of hot chocolate Both ane goods for her Each CD costs S1O, and each op f chocolate costs $2. For each of the toling decide whether this is Kory's optimal dle. If not, what should Kory do to ach msumption bundle L Kory is considering bining 4 CDs und chocolate At that bumdle her

Explanation / Answer

Solution 5:

There are two effects that occur simultaneously here:

1. Due to inflation, the prices increase and Ina can buy less of the goods as before due to decrease in purchasing power. Also, due to an increase in income , the purchasing power increases. The net effect remains that the budget line does not change and the steepness remains the same.

2. There is a parallel shift in the budget line inwards. Inflation increases prices by 20% and increase in income raises pruchasing power by 10% only, the net effect being reduction in purchasing power by 10%.

Hence, budget line shifts inwards.

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