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There are two goods: housing (h) and "money for other goods" (m). The price of housing is ph and the price of "money for other goods" is 1. For simplicity assume that ph = 1. John's income is 500 and his current consumption bundle is (250, 250).

(a) One way to stimulate housing consumption is to give the consumer an income subsidy. Suppose that John is given an income subsidy of 275. Suppose that John chooses bundle (300, 475) after receiving the subsidy. Represent the budget line before and after the income subsidy and indicate John's consumption bundles before and after the subsidy.

(b) Alternatively, the government can offer coupons that can only be redeemed for housing. Suppose that John is offered a housing coupon worth 275 and represent the budget line faced by John in this case. What bundle will John choose when offered the coupon? Compare it with the bundle chosen under the income subsidy.

(c) Now suppose that John's chosen level of housing under the income subsidy is 260. How much does he spend on other goods? Would the answer to (b) change in this case? How?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M948340

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