Question

Housing policy: Housing subsidies vs. Cash offer

A low income household has a monthly income of 900, and is qualified to receive certain welfare from government in housing.

This household has the following utility function and faces the following market information:

U = X.Y where X is the housing consumption (sq.) while Y represents all other goods; Price of X (housing per square foot) is $0.5, and price of Y (all other goods) is normalized to be $1. Hint: MRS = Y/X

1.1. What will be the consumption bundle for this household when no subsides or welfare is offered? (hint: utility maximization given the budget constrain)

1.2. What will be the consumption bundle if this household receives a cash offer of 300 per month from government?

1.3. Instead of receiving cash offer, they are subsidized by a housing voucher program, which specifies their out-of-pocket cost for housing is $270 per month. To keep this household equally happy as in (1.2 receiving cash offer),

a. What will be their consumption bundle?

b. How much is the subsidy amount from government?

c. Compare to the cash offer, which program is more cost effective from tax payer’s perspective?

Answer 1