Plot the budget line and evaluate slope, Business Economics

This problem illustrates a consumer's decision to be homeless in the presence of a minimum housing-consumption constraint, imposed through misguided government regulation. Let c denote "bread" consumption and q denote housing consumption in square feet of floor space. Suppose that a unit of bread costs $1 and that q rents for $1 per square foot. The consumer's budget constraint is then c + q y, where y is income, which equals $1,000 per month.

(a) Plot the budget line, putting q on the vertical axis and c on the horizontal axis. What is the budget line's slope?

(b) Suppose that minimum housing-consumption constraint says that q must be 500 square feet or larger. Show the portion of the budget line that is inaccessible to the consumer under this constraint. Assuming the consumer rents the smallest possible dwelling, with q = 500, what is the resulting level of bread consumption?

Assume that the consumer's utility function is given by U(c, q) = c + α ln(q + 1), where ln is the natural log function (available on your calculator). Using calculus, it can be shown that the slope of the indifference curve at a given point (c, q) in the consumption space is equal to -(q + 1)/α.

(c) Assume that α = 101. Supposing for a moment that the minimum housing-consumption constraint were absent, how large a dwelling would the consumer rent? The answer is found by setting the indifference-curve slope expression equal to the slope of the budget line from (a) and solving for q. Note that this solution gives the tangency point between an indifference curve and the budget line. Is the chosen q smaller than 500? Illustrate the solution graphically.

Compute the associated c value from the budget constraint, and substitute c and q into the utility function to compute the consumer's utility level.

(d) Now reintroduce the housing-consumption constraint, and consider the consumer's choices. The consumer could choose either to be homeless, setting q = 0, or to consume the smallest possible dwelling, setting q = 500. Compute the utility level associated with each option, and indicate which one the consumer chooses. Compute the utility loss relative to the case with no housing-consumption  constraint. Illustrate the solution graphically, showing the indifference curves passing through the two possible consumption points.(e) Now assume that α = 61. Repeat (c) for this case.

(f) Repeat (d).

(g) Give an intuitive explanation for why the outcomes in the two cases are different.

Posted Date: 3/2/2013 6:48:47 AM | Location : United States







Related Discussions:- Plot the budget line and evaluate slope, Assignment Help, Ask Question on Plot the budget line and evaluate slope, Get Answer, Expert's Help, Plot the budget line and evaluate slope Discussions

Write discussion on Plot the budget line and evaluate slope
Your posts are moderated
Related Questions
How do i come up with a project based on the above topic

Suppose you have ten individuals with values ( $1, $2, $3, $4, $5, $6, $7, $8, $9, $10) . Your marginal cost of production is $2.50. What is the profit maximizing price?

Explain the ways in which businesses may try to influence government policy in a way that might benefit them.   In the light of government regulation, businesses may become inv

QUESTION (a) Explain the relationship between scarcity, choice and opportunity cost. (b) What is market failure and why does it occur in an economy? (c) Differentiate, us

Calculate the incremental profit Electron Control would earn by customizing its instruments and marketing directly to end users.

The economy of Cotai contains 2000 $1 bills. (a) If people hold all money as currency, what is the quantity of money? (b) If people hold all money as demand deposits and bank

What is the failure effectiveness of multi-national companies (transnationals) in the promotion of development? TNC FDI failure into hindering development: • TNCs are accus

QUESTION (a) Analyze the characteristics of a monopoly market. (b) Distinguish between the short and long run equilibrium of a monopoly. (c) Compare and contrast between

Illustrate the implications of agricultural price instability problem for Less Developed Countries? Implications of agricultural price instability problem for LDCs: a. Agric

Ask question #. Explain why under fixed exchange rates the monetary policy is not effective#