Question
A student has two sources of expenses: living and consumption. If the student lives in an apartment with s square metres and consumes c consumables,
A student has two sources of expenses: living and consumption. If the student lives in an apartment with s square metres and consumes c consumables, then they receive utility
u(s, c) = s1/5c4/5
The student chooses apartment size and consumption amount to get the highest utility. Total living expenses are1000 + rs. Each unit of consumption costs 1. The student spends exactly 1800.
Under what conditions will the student live in a 20m2apartment? A 120m2apartment? An apartment between 20m2and 120m2? Now suppose each unit of consumption costs 2 (instead of 1). Everything else stays the same. Without solving the problem again, use the envelope theorem to approximate change in utility.
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