Chapter 7.1, Problem 5R

To determine

To describe the allocation of expenditure to a list of necessary things in a confined budget & changes when the prices of things increase.

Answer to Problem 5R

Monthly income given is $1000

The budget can be prepared as:

Lists of necessities	Budget allocated ($1000)
Food	$350
Clothing	$100
Gas	$100
Entertainment	$100
Medical expenses	$200
Transportation expenses	$150
Total	$1000

Explanation of Solution

Budget: It can be explained as an estimation of the expenditure and revenues for a defined period of time.

Assuming the price of gas was $10 per gallon. After an increase in the price of gas by $1, the allocated amount of $100 in the budget for gas consumption will reduce and as now the price is $11 per gallon, only 9 gallons of gas will be purchased instead of 10 gallons purchased earlier.

The changes in the budget depends upon the consumers preference of consumption, if the person can’t reduce the consumption of gas even if the price has been increased, he would sacrifice something else from his necessities which holds least opportunity costs of consuming more gas and sacrificing the other necessity.