Question

6. A consumer purchases housing (H) and spends the remainder of income on a composite good (OG). Her preferences over housing and the composite good are monotonic, complete, transitive and convex. The government is considering one of two policies. Policy A subsidizes housing, reducing its price by $50 per unit. With the subsidy in place, the consumer purchases 10 units of housing and Y units of the composite good. Policy B instead provides a lump-sum cash payment $500. Which of the following statements is accurate?

a. The consumer prefers Policy A to Policy B, and will consume more housing under Policy A than Policy B.

b. The consumer prefers Policy A to Policy B, and will consume more housing under Policy B than Policy A.

c. The consumer prefers Policy B to Policy A, and will consume more housing under Policy A than Policy B.

d. The consumer prefers Policy B to Policy A, and will consume more housing under Policy B than Policy A.

e. The consumer is indifferent between Policy A and Policy B, and will consume the same amount of housing under both policies.

7. Jennifer works at a coffee house and earns $150 per week to spend on coffee and other goods. Her preferences are complete, transitive, monotonic, and convex. The price of coffee is $2 per cup. Given her budget constraint, Jennifer maximizes her utility by consuming 10 cups of coffee and $130 worth of other goods per week. The coffee shop then announces that it will cut employees’ wages; Jennifer will now earn only $135 per week. However, the coffee shop also announces that it will now give employees a discount, reducing the price of coffee to $0.50 per cup. Compared to before, Jennifer is now:

a. no better or worse off, and she continues to buy 10 cups of coffee and $130 worth of other goods per week.

b. worse off, and she now buys more than 10 cups of coffee and less than $130 worth of other goods per week.

c. better off, and she now buys more than 10 cups of coffee and less than $130 worth of other goods per week.

d. worse off, and she now buys less than 10 cups of coffee and more than $130 worth of other goods per week.

e. better off, and she now buys more than 10 cups of coffee and more than $130 worth of other goods per week.

Answer 1

Answer : 6) The correct option is a.

Because under policy A government reduces price by $50 per unit and after that consumer consumes 10 units housing and Y units composite good. Theerefore , total consumption is (10 + Y) and total subsidy becomes 50( 10 + Y ) = 500 + 50Y.

In policy B, government provides only $500 lump-sum payment which is less in comparison to policy A's total subsidy amount.

Therefore, the consumer obviously prefer the policy A to policy B and consume more in policy A.

7) The correct option is a.

Because at first Jennifer income was $150 and she spends $20 on 10 cups coffee and $130 on other consumption per month. But after decreasing income the price of per coffee is $0.50. This means Jennifer can purchase 10 cups coffee at $5. Jennifer's new income is $135. Now she can spend $5 on coffee and $130 on others without reducing quantity level of earlier consumption. Therefore, Jennifer has no better off or no worse off in her new income amount.