Household Budgetary Responses to Variation in the Cost of Living

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Rodin, Aimee
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The Honors project is potentially the most valuable component of an Honors education. Typically Honors students choose to do their projects in their area of study, but some will pick a topic of interest unrelated to their major.

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This paper examines how local prices for housing ,health care and other goods affects household budget allocations using Bureau of Labor Statistics (BLS) data on expenditures and prices by city. This data was provided by the BLS at our request. Our results are based on data from 1987 – 2016 for 19 cities. The study first examines the extent to which prices are uniquely determined by factors in the city or are common across cities. We find that housing and clothing prices are mainly driven by city-specific effects. We then estimate income elasticity and own- and cross-price effects of price changes on demand for each commodity using the Almost Ideal Demand system. We find that food eaten away from home, transportation, and healthcare are luxury goods and that all other categories observed in the budget share are considered necessities. Notably, we observed that housing is a substitute with food away from home and we observed that as the price of housing increases, so too does the percent of income spent on housing.