Currently. the price of consuming housing 
is lowered by the fact that home mortgage interest is tax deductible. Suppose the government proposed to eliminate this implicit subsidy of your housing consumption, raising the price from 
to
src="https://sciemce.com/media/3/ppg__cognero__Chapter_06_Doing_the_quot_Best_quot_We_Can__media__3e7add47-491f-48be-8fcb-fd865a8ddf80.PNG" style="vertical-align: -8px;" width="17px" height="28px" align="absmiddle" />. At the same time, the government lowers the tax on other consumption, lowering the price from 
to 
.
a. Write down your original budget constraint assuming the consumer has income I.
b. Suppose the utility function 
captures your tastes, and suppose 
, 
, 
, 
and 
. Write out the utility maximization problem for this consumer prior to any policy change.
c. How much housing and other goods will this consumer consume prior to any policy change?
d. When the policy change goes into effect, will this consumer still be able to afford the bundle you derived in (c)?
e. When the policy change goes into effect, what bundle will the consumer consume?
What will be an ideal response?
a. 
b. 
c. 
d. Yes, because 
.
e. Solving 
, we get 
.
Economics
src="https://sciemce.com/media/3/ppg__cognero__Chapter_06_Doing_the_quot_Best_quot_We_Can__media__3e7add47-491f-48be-8fcb-fd865a8ddf80.PNG" style="vertical-align: -8px;" width="17px" height="28px" align="absmiddle" />. At the same time, the government lowers the tax on other consumption, lowering the price from to .
a. Write down your original budget constraint assuming the consumer has income I.
b. Suppose the utility function captures your tastes, and suppose , , , and . Write out the utility maximization problem for this consumer prior to any policy change.
c. How much housing and other goods will this consumer consume prior to any policy change?
d. When the policy change goes into effect, will this consumer still be able to afford the bundle you derived in (c)?
e. When the policy change goes into effect, what bundle will the consumer consume?
What will be an ideal response?
b.
c.
d. Yes, because
.e. Solving
, we get .You might also like to view...
Recent proposals for immigration reform that have drawn intense political fire include the following, except:
A. Increase fines for employers who knowingly hire illegal immigrants B. Implement a new amnesty program for illegal immigrants C. Shift immigration quotas away from family ties toward education-level and skills D. Create a guest-worker program with a tight cap
Advertising claiming superior quality of a product makes its demand
a. More elastic b. Less elastic c. Perfectly elastic d. None of the above
As the price of video games is raised from $40 to $45, their quantity demanded fell from 1.5 million copies to 1.2 million copies. The elasticity of demand of video games is:
a. 0.25 b. 1.89 c. 1.66 d. 2.08
If there are no profits in competitive equilibrium, why do firms produce? How can they stay in business?
What will be an ideal response?