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

What is the function of a quality plan, What is the function of a Quality P...

What is the function of a Quality Plan? Who must create it? The Quality Plan effectively defines how the work is to be executed and this is complementary to the Project Plan th

What are the reasons for globalisation, What are the reasons for globalisat...

What are the reasons for globalisation? Globalisation is the result of: • Enhancements in communications and transport, • Elimination of trade limits and exchange contro

Elasticity, 1. Why does the quantity of salt demanded tend to be unresponsi...

1. Why does the quantity of salt demanded tend to be unresponsive to changes in its price?

Growth stock and p/e ratio , Part 1 : Show the P/E ratio for each company. ...

Part 1 : Show the P/E ratio for each company. Answer the question: Which of these two firms seems to be more of a "growth stock"? Explain the reasons for your choice. Part 2:

Difference between absolute and comparative advantage, What is the differen...

What is the difference between absolute and comparative advantage? Difference between absolute and comparative advantage: • Absolute advantage arises while a country or reg

Describe average in the class so far, On the first exam your score was a 96...

On the first exam your score was a 96%, on the second it was an 89%, and on the third test it was a 79%. The first exam is worth 10% of your grade, the second is worth 19% of your

What are the similarities among the developing economies, What are the simi...

What are the similarities among the developing economies? Common characteristics of LDCs (Less Developed Countries) include: • Low living standards (that is low real income

Statistical analysis of data, Q1 An important first step to the statistical...

Q1 An important first step to the statistical analysis of data is to "get to know your data".  The following tasks should contribute to this. (a)   To the right of the dataset c

Price ceilings and floors, Price Ceilings and Floors 1. Explain the im...

Price Ceilings and Floors 1. Explain the impact on the market if the government imposes the following price ceilings and floors.  2. Draw two graphs, one for eggs, and one

Economic growth and its potential benefits to the economy, QUESTION ...

QUESTION Evaluate the roles and functions of the Bank of Mauritius in ensuring monetary stability in the economy. Explain Economic growth and its potential benefits to th

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