Question
Letcdenote bread consumption and qdenote housing consumption in square feet of floor space. Suppose that a unit of bread costs $1 and that q rents
Letcdenote "bread" consumption and qdenote housing consumption in square feet of floor space. Suppose that a unit of bread costs $1 and that qrents for $1.80 per square foot. The consumer's budget constraint is then c +1.8q =y, whereyis income, which equals $2,000 per month.
a) Plot the budget line, puttingqon the vertical axis andcon the horizontal axis. Label your graph. What is the budget line's slope?
b) Draw an indifference curve, showing the optimal choice for a hypothetical consumer, where the optimal choice ofqis less than 600 square feet.
c) Suppose that minimum housing-consumption constraint maintains thatqmust be 600 square feet or larger. Show the portion of the budget line that is inaccessible to the consumer under this constraint. Assuming the consumer rents the smallest possible dwelling, with q =600, what is the resulting level of bread consumption?
d) Assuming the 600-square-foot minimum dwelling size restriction, calculate the individual's utility if homeless and also the individual's utility if consuming a dwelling that just meets the required minimum. What will the consumer choose? Explain.
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