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ps2x313_s06 - why 2 Assume that Abe has the following...

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1. Assume that a typical very nicely behaved consumer is choosing between housing services measured in square feet at a price $P/unit and the consumption of all other goods aggregated and measured in dollars. a) Show a typical equilibrium position in an indifference curve/budget line diagram. b) Now suppose that the government agrees to subsidize consumers by paying 10% of their housing expenditures. How will the budget line change? Describe where the new equilibrium would be and illustrate. c) Suppose that instead, the government considers a lump-sum income supplement. Show in your diagram the minimum amount of income supplement the government would have to give the consumer, instead of the housing subsidy, to make the consumer as well off as he/she was in situation (b). d) Does the government spend more in part (b) or in part (c) in terms of the vertical good $aog? e) If the government’s goal is to stimulate the hosing market, what plan is better and briefly
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Unformatted text preview: why? 2. Assume that Abe has the following utility function: u=y+x 1/2 a) Would you say Abe is nicely behaved, or very nicely behaved? b) Find his demand system. c) What, if anything, is remarkable about Abe’s demand system? 3. Assume very nicely behaved preferences and show/prove/convincingly argue that if there are only two goods (X and Y) to choose from, then both cannot be inferior goods. 4. Consider a very nicely behaved consumer who purchases 100 units of good X and 80 units of good Y. These are the only two goods in the utility function. Suppose that the price of good X rises by 40 cents per unit and the price of good Y drops by 50 cents per unit, while the consumer’s nominal income remains unchanged. Will the consumer buy more, less, or the same of good X? Explain. Econ 313.2 - Wissink – Spring 2006 PS#2 - XtraQ DUE: Friday Feb 17 at the START of class....
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