Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Accounting Basics Expert

Intermediate Macroeconomics

I. Consider the subsequent static optimization problem.  Assume that a consumer has financial wealth W and owns house H.  She has utility over housing H and non-housing consumption C.   Assume that P is the price of housing in terms of non-housing consumption, so the budget constraint is W + P .H = C + P .H.  At last, suppose that non-housing wealth happens to equivalent housing wealth, so that W = H.

Assume that utility is log(C) + log (H).

Note: Housing is continuous variable.  The consumer can just live in her house with H = H, or you may select to live in a smaller (HH) house.  In those cases, as the budget constraint makes clear, the consumer purchases or sells some extra house. 

A.  Prove that if P=1, the solution to the consumers problem is C* = H* = H = W.  

B. Show the solution in a chart in (C, H)-space, i.e., with the indifference curve tangent to budget constraint.  

C. Now consider the situation where P>1.

i. Can the consumer silent consume (C*, H)?  That is, is the previous allocation still feasible?

ii. How will optimal solution change from (C*, H) when P>1?  describe for the optimal values of C and H in terms of P and H.  

iii. Show new optimum in chart.

D. Now consider situation where P<1.

i. Show the new optimum in the chart.

E. Compute optimized utility in the terms of P (i.e., the indirect utility function). Rank optimized utility in cases P=1, P>1, and P<1.

F. What does result in E tell you about dual role of housing as an asset and as consumption good?

I. assumes all that happens in this economy is that household consumes housing and non-housing consumption.  (This problem is a bit tricky, but is relevant for understanding the housing bubble.)

A. What is GDP in this economy (in terms of the variables in Part I)?

B. How does GDP in this economy change with P?

C. But we learned that asset prices don’t directly affect GDP.  So why does GDP raise with P in this economy?

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M91106

Have any Question? 


Related Questions in Accounting Basics

How would the auditors opinion differ if the financial

How would the auditor's opinion differ if the financial statements of a company that was a foreign private issuer were prepared in conformity with IFRS and filed with the SEC rather than prepared in conformity with U.S. ...

Research problem you are interviewing a client before

Research Problem : You are interviewing a client before preparing his tax return. He indicates that he did not list as income $96,000 received as a recovery for false imprisonment. What should you do with respect to this ...

Problem 1 - on may 1 2014 abc corporation purchased

Problem 1 - On May 1, 2014, ABC Corporation purchased equipment for $60,000 by issuing a one-year, 4% note payable, with interest to be paid at maturity on May 1, 2015. The company routinely depreciates its equipment ove ...

Accounting questionsmodule focuses on the concept of red

Accounting Questions: Module focuses on the concept of red flags and how we detect these inside a corporation. This is important, as the internal controls mechanism should define a specific approach for monitoring financ ...

Changes in accounting principles and changes in accounting

"Changes in Accounting Principles and Changes in Accounting Estimates" Please respond to the following: • From the e-Activity, discuss the accounting principles that the identified company changed, and explain the major ...

Practice questionsfarmer george tractors ltd has

Practice questions: Farmer George Tractors Ltd has £500,000 to invest. The net cash flows of two possible projects are as follows: Year Project 1 Project 2   £ £ 1 80,000 90,000 2 100,000 110,000 3 180,000 190,000 4 140, ...

Task - task covers study schedule weeks 5-12 inclusiveq21-

Task - Task covers study schedule weeks 5-12 inclusive. Q2.1- Naming cells in spreadsheets Critically evaluate a YouTube video on naming cells in spreadsheets. What are the advantages of naming cells in formulas Paste an ...

Taxation law and practice assignment-questionstephanie

TAXATION LAW AND PRACTICE ASSIGNMENT- QUESTION Stephanie Rogan ran her own advertising company.  Stephanie was an advertising executive with a large advertising agency company, Greater Union Advertisers Pty Ltd.  She lef ...

Dq1explain how the account of biblical creation can be

DQ1 Explain how the account of biblical creation can be viewed as a model for innovative and creative leaders when managing chaos. DQ2 Hypothesize why it is important for leaders both to create and enable chaos as well a ...

Assignment 1 -scf-indirect method and net cash flow from

Assignment 1 - (SCF-Indirect Method, and Net Cash Flow from Operating Activities, Direct Method) Comparative balance sheet accounts of Marcus Inc. are presented below. MARCUS INC. COMPARATIVE BALANCE SHEET ACCOUNTS AS OF ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

A cola-dispensing machine is set to dispense 9 ounces of

A cola-dispensing machine is set to dispense 9 ounces of cola per cup, with a standard deviation of 1.0 ounce. The manuf

What is marketingbullwhat is marketing think back to your

What is Marketing? • "What is marketing"? Think back to your impressions before you started this class versus how you

Question -your client david smith runs a small it

QUESTION - Your client, David Smith runs a small IT consulting business specialising in computer software and techno

Inspection of a random sample of 22 aircraft showed that 15

Inspection of a random sample of 22 aircraft showed that 15 needed repairs to fix a wiring problem that might compromise

Effective hrmquestionhow can an effective hrm system help

Effective HRM Question How can an effective HRM system help facilitate the achievement of an organization's strate