Question

The average individual in a country earns an annual salary of $82,000, of which

$32,800 is spent on housing, $14,760 on food, $14,760 on transportation, and $19,680
on other goods and services. Suppose the government in this country mandates that
all salaries and the prices of all goods and services be reduced by 40 percent.
Instructions: Enter your answers as a whole number.
a. How much does the average individual now earn?
$
b. How much does the average individual now spend on housing, food, transportation,
and other goods and services?
Housing: $
Food: $
Transportation: $
Other goods and services: $
What happened to the average individual's real salary?

Answer 1

a) $49,200

b)
Housing: $19,680

Food: $8,856

Transportation: $8,856

Other goods and services: $11,808

c) Average real salary is unchanged at $0

Explanation:

Since salaries and expenses are reduced by 40% if any of the amounts was originally $x, the reduction is 40% of $x = 0.4x (1% = 1/100)

Therefore reduced value = original value - reduction amount

= x - 0.4x

= 0.6x

Applying this to the various dollar values provided will help us answer the questions

Real income before reduction
= Salary - expenses

= 82,000 - (32,800 + 14,760 + 14,760 + 19,680)

= 0

So the average individual real income is $0

a) How much does the average individual now earn?
New salary = 0.6 x old salary
= 0.6 x $82,000
= $49,200

b) How much does the average individual now spend on housing, food, transportation, and other goods and services?

• Housing: 0.6 x $32,800 = $19,680
• Food: 0.6 x $14,760 = $8,856
• Transportation: 0.6 x $14,760 = $8,856
• Other goods and services: 0.6 x $19,680 = $11,808

Total expenses after reduction = $19,680 + $8,856 + $8,856 + $11,808

= $49,200

Real income after reduction of salary and expenses
= $49,200 - $49,200 = 0

So the average salary stays the same at $0