aps2x313_s06 - Econ 313.2 - Wissink Spring 2006 PS#2 XtraQ...

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A' BLo BLincome F E D C B Housing $aog ICafter BLsub A 1. Assume that a typical very nicely behaved consumer… a) See bundle A. b) The new budget line is BLsub and since we said in class to assume that Housing is normal, then you know that the new bundle must be on BLsub to the right of A’, so suppose it is B. Note the government must then spend a total of distance BC in $aog for the program. c) Now the government gives you distance DE in dollars and you end up at bundle D. d) Since DE=FC<BC, the government spends more with the housing subsidy program in part (b). e) If the government’s goal is to stimulate the hosing market, use the plan in (b) since B has to be to the right of D on the indifference curve IC after . 2. Assume that Abe has the following utility function: u=y+x 1/2 a) Abe is nicely behaved but not very nicely behaved since his indifference curves will crash into the axes. b) Note:
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