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Unformatted text preview: UBC COMM 295/FRE 295 Solution to Problem Set #2 Consumer Choice 1. The local farmer's market sells corn for $0.20 each. At this price, Sam buys 6 every Thursday. Show in a diagram what would happen to Sam's consumption of corn if the market offered corn at $0.20/corn for the first 6, but $0.10/corn for each additional corn? 2. A consumer decides not to buy a VCR when her income is $18,000. However, when her income rises to $30,000, she decides to buy one. In a single diagram, draw the budget lines and indifference curves to illustrate this situation (assume the VCR costs $300 in both time periods). 3. Suppose that the government subsidizes housing expenditures of low-income families by providing a dollar-for-dollar subsidy to a familys housing expenditure. The Cunninghams qualify for this subsidy and spend a total of $500 per month on housing: they spend $250 of their own and receive a government subsidy of $250. Recently, a new policy has been proposed that would provide each low income family with a lump sum transfer of $250 U 1 U2 >u1 A B 6 Corn y/0.2 Other goods y/0.1 which can be used for housing or other goods (and this new income is just good enough to buy the old housing level). Using a graph, demonstrate whether the Cunninghams would prefer the current program, the proposed program, or would be indifferent between the two. Assume for simplicity that prices of both housing and other goods = $1 With a dollar for dollar subsidy, they can buy maximum 2y housing (instead of y without subsidy). With this budget line, they spend $500 on housing (250 of their own+250 subsidy).subsidy)....
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- Winter '09