Y7

2. Assume both housing and the numeraire are normal goods and that housing is measured in units of quality that cost $3 per unit.

(a) Suppose a household with income of $1500 per month currently spends exactly 30% of their income on housing, and the remainder on the numeraire. On a graph, plot the budget constraint, the current bundle (labeled "A") and the corresponding indifference curve. Label all intercepts on the graph axes and also the values for bundle A. (b) On the same graph, show the new budget constraint with a housing voucher policy the provides a $600 housing voucher each month. Label the bundle chosen under this policy (labeled "B") and corresponding indifference curve. (c) On the same graph, show the bundle with public housing (labeled "C") and corresponding indifference curve, assuming public housing provides 350 units of housing and households pay 30% of their income for housing. (d) Which of the two policies (housing voucher vs. public housing) is preferred by qualifying households? (e)Which of the two policies leads to higher quality housing?