Question

Math and Economics You have seen that consumers' demand is affected by their level of income. Current income can, however, be supplemented by the use of credit (borrow- ing). Often, the availability of credit makes it easy for people to spend more than they really can afford. You need to be careful about how much you bor- row. How much credit can you afford? As a rule of thumb, the amount of credit payments you make each month should be less than 20 percent of your take-home pay. Thus, if you have take-home pay of $1,500, you should not have more than $300 a month in credit payments ($1,500 x 0.2= $300). This amount does not include housing.

A family has an after-tax (take-home) income of $3,600 per month after paying for their housing. Currently, the family's monthly payment on their Sear's charge is $122. They also have a VISA payment of $110 per month. Last week, they decided to replace the family car with a new minivan. Assuming that they have no other credit payments, how large a monthly car payment can they afford?​

Answer 1

To determine how large a monthly car payment a family can afford, we need to consider their take-home pay and their existing credit payments. The rule of thumb is that the total credit payments should be less than 20% of their take-home pay. In this case, the family has a take-home pay of $3,600 per month and existing credit payments of $122 (Sear's charge) and $110 (VISA). So, their total credit payments are $232 per month. Therefore, the family can afford a maximum monthly car payment of $488.

Step-by-step explanation:

To determine how large a monthly car payment a family can afford, we need to consider their take-home pay and their existing credit payments. The rule of thumb is that the total credit payments should be less than 20% of their take-home pay. In this case, the family has a take-home pay of $3,600 per month and existing credit payments of $122 (Sear's charge) and $110 (VISA). So, their total credit payments are $232 per month. Let's calculate the maximum monthly car payment they can afford:

20% of $3,600 = $720

Subtracting the total credit payments from the maximum amount:

$720 - $232 = $488

Therefore, the family can afford a maximum monthly car payment of $488.