Intermediate Microeconomics, 2008
Problem Set No 4
due: Wednesday / Thursday, Jan, 23 / 24
Problems
A) Please, solve the following problems from the book. Question 32 is chal
lenging but you can use your results on Cobb Douglas Preferences quite a lot
later:
1)
4)
6)
10)
16)
20)
32)
B) Consider Jen, a consumer with preferences U(H,F)=
F
1
3
H
2
3
, where H is
the quantity of housing and F is the quantity of food (per month).
Suppose
Jen has a stipend of $600/month which she uses to purchase food at a price of
$1/unit and housing at a price of $10/unit.
a. Compute Jen°s utilitymaximizing bundle of goods.
b.
Suppose that Jen°s employer subsidizes housing by paying 50% of her
total housing costs, thereby e/ectively lowering the price Jen pays for housing
to $5/unit. Compute Jen°s new optimal consumption bundle. (Hint: These are
CobbDouglas Preferences)
c. How much does Jen°s employer pay in total for this subsidy?
d.
Suppose that her employer simply gave Jen the dollar cost you found
in (c) as a lump sum (instead of subsidizing housing). Will Jen gain a higher
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 Winter '08
 KUHN
 Economics, Microeconomics, Utility, Jen

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