Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 2

Suppose that people derive utility from two goods-housing (H) and all other consumption goods
(C).
a. Show a typical consumer s allocation of his or her income between H and C.
b. Suppose that the government decides that the level of housing shown in part a (say, H*) is ''substandard and requires that all people buy H** H* instead. Show that this law would reduce this person s utility.
c. One way to return this person to the initial level of utility would be to give him or her extra income. On your graph, show how much extra income this would require.
d. Another way to return this person to his or her initial level of utility would be to provide a housing subsidy that reduces the price of housing. On your graph, show this solution as well.