Reference no: EM132632352
1. When it comes to housing, all Martha cares about is the amount of floor space in her residence. Her preferences for housing (H) and all other goods (Y) are described by the utility function U = HY.
Her marginal rate of substitution given by
MRSH,Y = Y/H.
Martha's monthly income is $1000 and the market prices of a sq. ft. of floor space and all other goods are each $1.
Because of her low monthly income, Martha is eligible for public housing where tenants pay only one-quarter of the market rent per sq. ft. of floor space. The largest apartment in any of these buildings is 400 sq. ft.
a. Show that Martha will move into a public housing unit. Will Martha increase or decrease her consumption of housing by moving into the public housing project? If apartments of all sizes were available in public housing projects, would she choose an apartment of the same size?
b. How much does the rental subsidy for Martha's living in the public housing project cost the government each month? If Martha were given this amount as a monthly cash grant, would she choose a larger or smaller apartment than she rents in the public housing project? [You should be able to answer this question without calculating her new optimal bundle.]
c. How much is the public housing program worth to Martha; that is, how much income would she have to be given to be just as well off as she is under the public housing program? How does this compare with the cost of the program?