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PS 1 - would Alice prefer Using an appropriate diagram...

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Quantitative Microeconomics Problem Set #1 1) Suppose that Alice’s income is $500 per week and she spends all of it on housing and all other goods. (Both are normal goods.) Since Alice lives in New Orleans and lost her home to Hurricane Katrina, a variety of plans have been proposed to help consumers like Alice to find suitable housing. Both of the two Presidential candidates thought that winning the election depended on proposing the right plan for the typical consumer. Plan A would be a matching grant program where the Federal government would share the cost of housing. For each dollar spent on housing, the federal government would give the consumer $.05 to add to her budget. The maximum amount the consumer could get would be $25 per week. Suppose that, with the plan Alice would choose 100 units of housing. Plan B pays a cash grant of $5 per week regardless of the amount of housing that individuals choose. Would Alice buy more housing with plan A, with plan B, or is it uncertain? Which
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Unformatted text preview: would Alice prefer? Using an appropriate diagram, explain thoroughly how you arrived at your answers. (You may assume for simplicity that the price of all other goods equals $1 per unit and the price of housing equals $1 per unit.) 2) Fred Jones lives in Baltimore. His income is $M per month and his utility function for housing (H) and all other goods (G) is: U(H,G)=H 1/3 G 2/3 a) The current prices are P H per unit for housing and P G per unit for all other goods. Derive Marshallian or ordinary demands for housing and all other goods. (Show all of your work.) b) Suppose that, when Fred lives in Baltimore, P H =1 and P G =2 and Fred’s income (M) equals $30000. If Fred is transferred to Boston, P H increases to 8. How much income would Fred’s employer have to pay for Fred to be exactly as well off as he was in Baltimore? Show how you derived your answer....
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