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  • Suppose You Have 400 000 To Spend On A House and

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    The document describes an economic problem where an individual has $400,000 to spend on a house and other goods. It asks several questions about how the individual would optimize their spending on housing and other goods under different price conditions for housing. Specifically, it asks how the individual's optimal housing purchase would change if the price per square foot of housing fell to $50 or rose to $200, and whether the individual would benefit from such price changes. It also considers how the individual's decisions would differ depending on assumptions about tastes for housing and other goods.

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    The document describes an economic problem where an individual has $400,000 to spend on a house and other goods. It asks several questions about how the individual would optimize their spending on housing and other goods under different price conditions for housing. Specifically, it asks how the individual's optimal housing purchase would change if the price per square foot of housing fell to $50 or rose to $200, and whether the individual would benefit from such price changes. It also considers how the individual's decisions would differ depending on assumptions about tastes for housing and other goods.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    6 views2 pages

    Suppose You Have 400 000 To Spend On A House and

    Uploaded by

    trilocksp Singh
    The document describes an economic problem where an individual has $400,000 to spend on a house and other goods. It asks several questions about how the individual would optimize their spending on housing and other goods under different price conditions for housing. Specifically, it asks how the individual's optimal housing purchase would change if the price per square foot of housing fell to $50 or rose to $200, and whether the individual would benefit from such price changes. It also considers how the individual's decisions would differ depending on assumptions about tastes for housing and other goods.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    Solved: Suppose you have 400 000 to spend on a house

    and
    Suppose you have 400 000 to spend on a house and

    Suppose you have $400,000 to spend on a house and “other goods” (denominated in dollars).

    A. The price of 1 square foot of housing is $100 and you choose to purchase your optimally
    sized house at 2000 square feet. Assume throughout that you spend money on housing solely
    for its consumption value (and not as part of your investment strategy).

    (a) On a graph with “square feet of housing” on the horizontal axis and “other goods” on the
    vertical, illustrate your budget constraint and your optimal bundle A.

    (b) After you bought the house, the price of housing falls to $50 per square foot. Given that you
    can sell your house from bundle A if you want to, are you better or worse off?

    (c) Assuming you can easily buy and sell houses; will you now buy a different house? If so, is
    your new house smaller or larger than your initial house?

    (d) Does your answer to (c) differ depending on whether you assume tastes are quasilinear in
    housing or homothetic?

    (e) How does your answer to (c) change if the price of housing went up to $200 per square foot
    rather than down to $50.

    (f) What form would tastes have to take in order for you to not sell your $2000 square foot
    house when the price per square foot goes up or down?

    (g) True or False: So long as housing and other consumption is at least somewhat substitutable,
    any change in the price per square foot of housing makes homeowners better off (assuming it is
    easy to buy and sell houses.)

    (h) True or False: Renters are always better off when the rental price of housing goes down and
    worse off when it goes up.

    B. Suppose your tastes for “square feet of housing” (x1) and “other goods” (x2) can be
    represented by the utility function u(x1,x2) = x1x2.

    (a) Calculate your optimal housing consumption as a function of the price of housing (p1) and
    your exogenous income I (assuming of course that p2 is by definition equal to 1.)

    (b) Using your answer, verify that you will purchase a 2000 square foot house when your
    income is $400,000 and the price per square foot is $100.

    Reach out to freelance2040@yahoo.com for enquiry.


    (c) Now suppose the price of housing falls to $50 per square foot and you choose to sell your
    2000 square foot house. How big a house would you now buy?

    (d) Calculate your utility (as measured by your utility function) at your initial 2000 square foot
    house and your new utility after you bought your new house? Did the price decline make you
    better off?

    (e) How would your answers to B(c) and B(d) change if, instead of falling, the price of housing
    had increased to $200 per square foot?

    Suppose you have 400 000 to spend on a house and

    ANSWER
    https://solvedquest.com/suppose-you-have-400-000-to-spend-on-a-house-and/

    Reach out to freelance2040@yahoo.com for enquiry.


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