Question

A low income household has a monthly income of 900, and is qualified to receive certain welfare from government in housing. This household has the following utility function and faces the following market information: U = X.Y where X is the housing consumption (sq.) while Y represents all other goods; Price of X (housing per square foot) is $0.5, and price of Y (all other goods) is normalized to be $1. Hint: MRS = Y/X .

3. Instead of receiving cash offer, they are subsidized by a housing voucher program, which specifies their out-of-pocket cost for housing is $270 per month. To keep this household equally happy as in (1.2 receiving cash offer),

c. Compare to the cash offer, which program is more cost effective from tax payer’s perspective?

Answer 1

м- 100 MRC = Moe MUY MRS - Now equato MRS with Price Patio MA'S = Px 0.5 7 Y = 0.55 Instead of cash offer, a housing vouchet program, specifics their out-of- pocket cost for housing = $270 per and keeping the utility same . 1.2. O from the tax paya's perspection cash ofse is more cost effective than the subsidy (voucher program because can offer costs $300 while the voucher program costs $ 703.33 whereas the utility to same from both ie 720,000.