Unformatted text preview: A2) If we put housing on the horizontal axis, what is the slope of the budget constraint? What is
the formula for the slope of the indifference curve (marginal rate of substitution)?
Slope of the budget constraint = Slope of the indifference curve =
A3) Solve the three equations for the optimal values of F and H. How does it correspond to
The first two first order conditions imply that → → Inserting into the budget constraint, we have
, , ∙ , → , Then H can be found by inserting F into the budget constraint and solving for H using
, ∙ , → , These correspond to the point (2000,500) in Figure 1 along indifference curve with
A4) What are the budget shares for Food and Housing ?
Expenditures on food are $500*20 = $10000 or 33.3% of the $30,000 food+housing budget.
Relative to the full income, this is $10,000/$64,000= 15.7%. Expenditures on housing are
$2000*10 = $20,000 which is 66.7% of the food+housing budget or 31.3% of the full
A5) Compute the utility at these values of F and H.
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- Fall '07
- Des Moines