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

Benefits for transferring drivers to transit, Distribution of benefits for ...

Distribution of benefits for transferring drivers to transit during a congested morning commute A residential suburb has N = 30,000 commuters who drive alone to jobs in a cen

What are the limitations of comparative advantage, What are the limitations...

What are the limitations of comparative advantage? Limitations of comparative advantage: International trade needs wide specialisation. This can have drawbacks as given b

ASSIGNMENT, What is a bowed out shape? Why does a production possibilities...

What is a bowed out shape? Why does a production possibilities frontier with increasing opportunity costa have a bowed-out shape?

What could you do to change things set new basis for future, Think of circu...

Think of circumstances at home, at work, at university or into a club to which you belong. This is a situation which involves you. You want to modify the present circumstances and

Economic analysis, There, you can obtain the available data on GDP and its ...

There, you can obtain the available data on GDP and its components. a. What is the value of nominal GDP during the past 5 years? b. What is the GDP deflator in 2006? c. Wh

Determine the critical path, S M Construction has been awarded a contract t...

S M Construction has been awarded a contract to build a new manufacturing plant just outside Cardiff. The activity on arrow table below gives data on the activities involved in the

What is meant by the term the triple constraint, What is meant by the term ...

What is meant by the term the triple constraint? What are the three elements of the triple constraint and why is an understanding of their relative weight significant in exercising

Socio economic problems, what are the major socio economic problems of Indi...

what are the major socio economic problems of India which hamper the growth and development

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