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

Price elasticity of demand, QUESTION 1 (a) Explain the relationship bet...

QUESTION 1 (a) Explain the relationship between scarcity, choice and opportunity cost. (b) How is choice about the use of scarce resources made in a market economy? QUES

Unemployment rate, In 2007, Segolene Royal, in an unsuccessful bid for pres...

In 2007, Segolene Royal, in an unsuccessful bid for president of France, says that employees who lost their jobs would obtain unemployment payments equivalent to 90% of the previou

What do you understand by the term "anthropometry"?, QUESTION 1 (a) Wha...

QUESTION 1 (a) What, according to you, are the ergonomic problems associated with the use of visual display units? Describe the measures which can be taken to eliminate these p

What is unbalanced growth theory, What is Unbalanced Growth theory? Un...

What is Unbalanced Growth theory? Unbalanced growth shares analysis along with balanced growth theorists which free markets cannot produce development. Planning of government

Change in currency rate, Change in Currency Rate Change in the sterlin...

Change in Currency Rate Change in the sterling currency rate has also great consequences because it depends upon the sterling currency rate to the other countries as well. As

Explain the effects of a minimum wage, Problem 1: (a) Suppose the gover...

Problem 1: (a) Suppose the government decides to implement a minimum wage to help low-income workers. How will the minimum wage affect the demand for labor and what does this i

What are the assumptions of unbalanced growth, What are the assumptions of ...

What are the assumptions of unbalanced growth? Development cannot be initiated through one industry. Government recognize strategically significant areas to planned economy or

Franchise, How can franchises ensure their products are appropriate for int...

How can franchises ensure their products are appropriate for international markets?

CORPORATE STRATEGY, WHAT STRATEGIES ARE SUGGESTED FROM THE CONVENTIONAL VIE...

WHAT STRATEGIES ARE SUGGESTED FROM THE CONVENTIONAL VIEW OF THE INDUSTRY LIFE CYCLE

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