Answer to Question #320473 in Microeconomics for Mahnoor

Question

Suppose that people derive utility from two goods—housing (H) and all other consumption goods (C).

a. Show a typical consumer’s allocation of his or her income between H and C.

b. Suppose that the government decides that the level of housing shown in part a (say, H*) is ‘‘substandard’’ and requires that all people buy H** > H* instead. Show that this law would reduce this person’s utility.

c. One way to return this person to the initial level of utility would be to give him or her extra income. On your graph, show how much extra income this would require.

d. Another way to return this person to his or her initial level of utility would be to provide a housing subsidy that reduces the price of hous- ing. On your graph, show this solution as well.

Answer 1

The graph below shows the consumer’s allocation of his income between two goods- housing (H) and all other consumption goods (C). At utility level of , the consumer consumes  units of housing and  units of all other consumption goods