Answer to Question #49695 in Microeconomics for Agi

Question

In this question, we wish to analyze the consumer's choice of housing. In particular, we want to compare the impact on utility of a change in the price of housing for a renter and a homeowner. You may assume that all individuals consume two things - housing (H), and a second consumption good (C).

Write down the renter's problem. Write down the homeowner's problem.

2. (10 points) What happens to the renter's utility when pH , the price of housing, changes? The homeowner's utility? What happens to the renter's optimal consump-tion of H and C? The homeowner's consumption?

3. (10 points) Some economists believe that, during the last economic crisis, the government should take action to boost housing prices. Analyze the effects of such a policy in light of your model.

Answer 1

1. In this case renters are suppliers and homeowners are consumers and there is equilibrium price of housing and quantity of rooms available.
2. Renter's utility increases when pH , the price of housing, increases, but homeowner's utility decreases in this case and conversely. The renter's optimal consumption of H and C will change and the homeowner's consumption will change too.
3. As some economists believe that, during the last economic crisis, the government should take action to boost housing prices, the effect of such a policy will be an increase of housing supply by the renters, because they were damaged during the crisis.