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

Explain the law of demand and the factors affecting demand, QUESTION (a...

QUESTION (a) Explain the law of demand and the factors affecting demand. (b) Explain and illustrate how demand of a commodity will change if there is a tax on that product.

Is the washington consensus actually a consensus, Is the Washington Consens...

Is the Washington Consensus actually a consensus? The Washington agreement thinking dominates development thinking in the developed world but is challenged through less develo

What is ricardos theory?, In brief, the price of anything is based on compa...

In brief, the price of anything is based on comparative benefit. If Adam makes clocks better and cheaper than Bill, all clock production should go to Adam.

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

What is Aid, What is aid? Aid is the administered transfer of resource...

What is aid? Aid is the administered transfer of resources by a donor country or international agency or non-government organisation to less developed countries to encourage e

Define the process of setting objectives, Define the process of setting obj...

Define the process of setting objectives. What might be objectives for a newly appointed junior programmer? A hierarchy of objectives cascades down through the overall intend o

Major area of decision making, What are the major area of decision making ?...

What are the major area of decision making ? How does economic theory contribute to managerial decision ?

What is dependency theory, What is dependency theory? Dependency The...

What is dependency theory? Dependency Theory: Dependency theory uses economic and political theory to describe how the procedure of international trade and domestic deve

How micro or microfinance credit assists in financial market, How is Micro ...

How is Micro or Microfinance credit assists in financial markets? Micro or Microfinance credit assists: • Grow businesses and raise the income of the poor • Extra income

Finacial Fiasco Book Review, Can anyone type me a paper on the book financi...

Can anyone type me a paper on the book financial fiasco? I will provide with a link to the book.

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