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Suppose a consumer wants to buy a new house and has a budget of 50 million. The consumer cares only about the size (S) of
Suppose a consumer wants to buy a new house and has a budget of 50 million. The consumer cares only about the size (S) of the house and the quality of construction (Q) of the house. Assume that if the consumer wants one more unit of size, then the builder wants 10 million. If the consumer wants one more unit of quality, then the builder wants 5 million. (Overall: 20% of the total marks) (a) Draw the consumer's budget line for size and quality. Place size on the horizontal axis. (8% of the total marks) (b) Suppose the consumer's preferences are such that the marginal rate of substitution is equal to (-4S)/Q. What value of each index will the consumer like to have in her house? (6% of the total marks) (c) Suppose the consumer's marginal rate of substitution is (-S)/Q. What value of each index will the consumer like to have in her house? (6% of the total marks}
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