Plot the budget line and evaluate slope, Business Economics

Assignment Help:

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.


Related Discussions:- Plot the budget line and evaluate slope

Job Creation, How much power or influence does a U.S. President versus a CE...

How much power or influence does a U.S. President versus a CEO actually have when it comes to job creation or the choice to manufacture company goods in a foreign nation?

Ppc, rice donation

rice donation

Explain about the term traditional economy, Explain about the term Traditio...

Explain about the term Traditional Economy. Traditional economy: It is where decisions regarding what, how and for whom to produce are based onto tradition and custom. A

Graphing Taxation., Demonstrate graphically the cost of income taxation of ...

Demonstrate graphically the cost of income taxation of 30% to consumers and producers for an income of $27,908. How does the taxation change if the income was $220,874? How does

“Ledger is said to be the principal book entry and t, “Ledger is said to be...

“Ledger is said to be the principal book entry and the transactions can even be directly entered into the ledger account.” Elaborate and explain why journal is necessary.

Historical perspective of corporate social responsibility, Question 1: ...

Question 1: The triple concepts-  globalisation, good governance and democracy-  have largely dominated international discourse since a long time.  (a) Briefly explain the ter

Determine the monopoly price and monopoly quantity, 1. A monopolist faces t...

1. A monopolist faces the industry demand Q=400-0.5 p and has constant marginal costs of 8, with no fixed costs. a) What is the monopoly price? What is the monopoly quantity?

What is sampling, Sampling and tests of significance are very important too...

Sampling and tests of significance are very important tools in business economics. In fact one cannot do any meaningful marketing research without the requisite knowledge of sampli

What do you mean by standard of living, What do you mean by standard of liv...

What do you mean by standard of living? Standard of living (SoL): It is incomer per capita (head) and it is determined by national income (GDP) divided through total pop

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd