SOLUTION: Johhny earns 5,000 per week and he receives 20% increase in income, what would be his real income after a week, assuming that inflation rate is at 10%.

Question 953377: Johhny earns 5,000 per week and he receives 20% increase in income, what would be his real income after a week, assuming that inflation rate is at 10%.
Answer by Theo(13342) (Show Source): You can put this solution on YOUR website!
you multiply by the increase in salary and you divide by the inflation rate.

5000 * 1.20 = 6000 / 1.10 = 5454.545454.....

let's see how that works.

assume his income is 5000 and his expenses are 4000.

the ratio of his income to his expenses is 5000 / 4000 = 1.25

he gets a 20% raise, but his expenses remain the same.

the ratio of his income to his expenses is now 6000 / 4000 = 1.5.

the increase in the ratio between his revenue and expenses before the raise and his revenue and expenses after the raise is equal to 1.5 / 1.25 which is equal to 1.2.

in other words, there was a 20% increase in the ratio of his revenue to his expenses.

this is exactly the same as the increase in his revenue.

now suppose that, when his revenue went up 20%, his expenses went up 10%.

his revenue is now 6000 and his expenses are now 4400.

the ratio of his revenue to his expenses is 6000 / 4400 = 1.363636.....

the ratio of his revenue to his expenses went from 1.25 before the raise to 1.363636..... after the raise when you take inflation into account.

the increase in the ratio between his revenue and expenses before the raise and his revenue and expenses after the raise is now equal to 1.363636... / 1.25 which is equal to 1.09090909...

if you take the salary rate increase and you divide it by the inflation rate increase, you will get 1.20 / 1.10 = 1.09090909.....

that is why, when looking at the real income adjusted for the rate of inflation, you multiply by (1 + the revenue increase rate) and you divide by (1 + the inflation increase rate).

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