Jen from Thunder Bay consumes housing (H) and food (F). Her student stipend is $600/month. She has a utility function of U(H, F) = F1/3H2/3. The initial price of food is pF = 1 and the price of housing is pH = 10. (a) Determine how much food and housing she consumes. (b) Suppose the government decides to subsidize her housing by 50%. This has the effect of lowering the price she actually pays for housing to $5. If the price of food is $1 and the price of housing is $5, calculate Jen’s utility maximizing bundle of goods. (c) How much does the Government spend on this program (just on Jen)?
Jen from Thunder Bay consumes housing (H) and food (F). Her student
stipend is $600/month. She has a utility function of U(H, F) = F1/3H2/3.
The initial
(a) Determine how much food and housing she consumes.
(b) Suppose the government decides to subsidize her housing by 50%.
This has the effect of lowering the price she actually pays for housing
to $5. If the price of food is $1 and the price of housing is $5, calculate
Jen’s utility maximizing bundle of goods.
(c) How much does the Government spend on this program (just on Jen)?
(d) Calculate her utility level using the utility function above and the
quantities consumed.
(e) Calculate Jen’s utility maximizing bundle and her resulting utility
level if the government chooses to simply give her the money they
would have spent on the program (rather than subsidize housing).
How much utility does Jen get?
(f) Given the two programs cost the same, which one is better for Jen?
Illustrate the budget constraints and indifference
optimal bundles for each of the programs. Your graph should make
clear which program is preferred.
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