Reference no: EM132155372

Consider Jen, a consumer with preferences U(F,H)=FH^2, MUf=H^2, MUh=2FH, where H is the quantity of housning and F is the quantity of food (per month). Suppose Jen has a stipend of 600 dollars/month which she uses to purchase food at a price of 1 dollar/unit and housing at a price of 10 dollar/unit.

a) Derive Jen's utility maximizing bundle given her budget constraint.

b) Suppose Jen's employer subsidizes housing by paying 50% of her total housing costs, thereby effectively lowering the price Jen pays for housing to 5 dollars/unit. Compute Jen´s new optimal consumption bundle. How much does Jen's employer pay in total for this subsidy?

c) Suppose instead that her employer simply gives Jen the dollar cost you found in (b) as a lump sum (instead of subsidizing housing). What bundle will she now choose?

d) What Jen would prefer if could choose, lump sum subsidy or lowering the price to 5 dollars/unit? (Compare utility levels Jen gets at consumption bundles you found in (b) and (c))