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

T-value associated with 25 degrees of freedom, What is the t-value associat...

What is the t-value associated with 25 degrees of freedom and 20% in the tail? (Please round your answer to 3 decimal places)

What are problems of the sustainability in economic growth, What are the pr...

What are the problems of the sustainability in economic growth? Sustainability Problem in Economic Growth: Recent economic growth makes threats the future quality of life. S

Is the balance of payments a problem, Is the balance of payments a problem?...

Is the balance of payments a problem? A persistent balance of payments shortage is bad when used to finance consumption, but good when financing imports of suitable capital wh

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

Aati, need assistance

need assistance

Define term project initiation in project management method, Define the ter...

Define the term project initiation in project management methods. Project initiation: It is a main control point in a project as this is where the Project Board gives for

What are factor endowment implications, What are factor endowment implicati...

What are factor endowment implications? Implications of factor endowment: • Less Developed Countries to specialise and export labour intensive goods, agriculture or commodit

Government spending - policy to overcome the recession, The government spe...

The government spending on given goods and several services including public. This is government spending on state-provided goods and services including public and merit goods. Dec

Managerial economics, Managerial economics is the discipline which deals wi...

Managerial economics is the discipline which deals with application of "economic theory to business management" Discuss

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

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