Microeconomic theory homework, Microeconomics

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In this section, we ask you to write down a simple, formal, mathematical model. A small number of points will be awarded for an intuitive discussion of the problem, but most of the points are reserved for a formal solution. Be careful to state all assumptions, and remember above all to keep your answers simple and straight-forward!

In this question, we wish to analyze the consumer''s choice of housing. In particular, we want to compare the impact on utility of a change in the price of housing for a renter and a homeowner. You may assume that all individuals consume two things - housing (H), and a second consumption good (C).

1. (10 points) Write down the renter''s problem. Write down the homeowner''s problem.

2. (10 points) What happens to the renter''s utility when pH , the price of housing, changes? The homeowner''s utility? What happens to the renter''s optimal consump-tion of H and C? The homeowner''s consumption?

3. (10 points) Some economists believe that, during the current economic crisis, the government should take action to boost housing prices. Analyze the e ects of such a policy in light of your model

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