Question
Using your results from above, suppose that income per household equals y=$25,000 per year.Next suppose that the commuting cost parameter t equals $10 per block.This
Using your results from above, suppose that income per household equals y=$25,000 per year.Next suppose that the commuting cost parameter t equals $10 per block.This means that a person living ten bocks from the CBD will spend 10*10=$100 per year getting to work.The consumers' utility functions are all U(c, q), where c is the quantity of bread (at $1 per loaf) consumed by the household and q is the quantity of housing per household, i.e. 1500 sq. ft.The consumers' budget constraints are all c+pq=y-tx. Under our special assumptions this reduces to c+1500p=25000-10x.Given that a household at x* faces a budget constraint, c+1500p*=25000-10x*, what is the value of c at x*? Call this c*.Explain why in equilibrium every household, regardless of location, must be consuming c*.Notice that since q is the same throughout the city, to have an equilibrium in which U is the same throughout the city, c must be the same throughout the city and everywhere equal to c*
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