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Unformatted text preview: Inserting into the 3rd first-order condition, we have . . → .
Because F=H, H= 1259.9. This is shown as the point (1259.9, 1259.9) on indifference curve
with U = 1259.9 in Figure 1.
B6) Demonstrate that this matches the utility in Des Moines.
Plugging these optimum values into the utility function, we have
, . . . which is the level in Des Moines. B7) The income level will be 47% of the salary in San Francisco. How does that salary compare
to the average salary for economists in San Francisco? Why might the salary in San Francisco
not fully compensate for the utility loss from higher home prices?
The level of expenditure necessary to get utility in San Francisco up to the level in Des ∙
. Since this is 47% of
the total salary, the San Franciso salary for economists would be $160,838. The actual
salary for economists averages $127,000. That suggests that economists are willing to
sacrifice utility from food and housing in order to live in San Francisco. If San Francisco
offers other amenities above and beyond those offered by Des Moines (cultural attractions,
location, scenery, proximity to recreational areas), workers are willing to ‘pay’ for those
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- Fall '07