NEED DIAGRAM! DO NOT JUST COPY THE ANSWER FROM THE COURSEHERO!! THX Mr. and Mrs. Brauer...

NEED DIAGRAM! DO NOT JUST COPY THE ANSWER FROM THE COURSEHERO!! THX

Mr. and Mrs. Brauer owned their own home. There was a real estate boom in their town and the price of houses doubled. Their income and prices of other goods stayed constant. The Brauers complained that “we are being driven from our home; we can’t afford to live here any more.” Assume the Brauers has two consumption goods: “housing” and “other goods”.

a. Draw a diagram that illustrates what happened to the Brauers’ budget constraint.

b. Could they have been made worse off by the change? Could they have been made better off? Explain why.

Solutions

Expert Solution

The budget line will swivel inwards indicating the decline in consumption of housing with the price of housing being doubled. It is also worth mentioning here that the budget line will swivel inward and not shift inwards. This is because there is only a rise in price of housing whereas the price of other goods have remained constant. The affordable sets have been indicated by the magenta colored region whereas grey shaded shows the unaffordable or non feasible sets. The sets which were feasible may now become non feasible after the price of housing doubled.
The consumers are now worse off with housing. They can now buy the same quantity of other goods but half of the housing as the price has doubled. The housing has now become unaffordable for the consumers. The same housing Set Will Now Cost More Than The Earlier Budget. This Means They Will Not Be Able To Buy The Same combination unless there is an increase in budget which is not the case here

Rahul Sunny answered 1 year ago

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