Isi peb 2014

[urvashi]

In q10 how do we derive the optimal level of education?

[knowpraveen]

The amount of money at the persons disposal would be Cm+Co(1/1+R)=wh(e)-e(1+R)

So, its clear that the money he gets to spend has to be at a maximum which  goes on to mean that wh(e)-e(1+R) should be at its maximum.

It's given that the value of w and R are exogenously given, hence w(dh/de) - (1+R)=0

Therefore, dh/de=(1+R)/w

As it is given in the question that double differential of h w.r.t e is negative, we have the maximum value of the function at dh/de=(1+R)/w.

Hence, this is how its going to vary. Correct me if I'm wrong urvashi. Thanks for asking.

[urvashi]

Thanx

[urvashi]

In q 6 im getting the current budget line parallel to x axis how do we show which of the programs will be preferred?

[urvashi]

Also how to do part b of question 3

[urvashi]

Im sorry q3 part a part 2

[knowpraveen]

Urvashi, the budget equation would be x+y=M+X (X being the  for rupee for rupee subsidy for housing) which boils down to x=M which is a line.

The other budget line would be x+y=M+250. Here, this is going to be the same as the previous equation for Y=250, in which case the consumer is neutral. Now draw the graph and use the principle of revealed preference to choose the apt subsidy. For Housing>250, according to warp, it would be better to use the rupee for rupee subsidy and if Housing <250, it would be better to use the lump-sum transfer. I hope its clear.

Correct me if I have gone wrong somewhere!

[knowpraveen]

This must be a question of reservation prices as we are given the valuation each trader gives to a chicken. Plot the graph accordingly. It's going to be a stepwise function, lets say quantity demanded is equal to one for prices ranging in between 8<p<=10. Complete the graph now. The supply function is Q=6 irrespective of what the prices are. So, we get a vertical line overlapping the demand curve in the region where 4<p<5. There is no unique equilibrium point as is clear from the above statement.

Correct me if I've gone wrong somewhere. Thanks! =)

[knowpraveen]

Okay, coming to the second part of that question -

Interchanging the demand functions would mean same profits only if the price of the non-student section is discounted which is really impossible, so the only way to go about this would be to avoid price discrimination here and charge the same price for both types of attendees. Solve for the combined profit maximizing quantity and find the profits. Hope it stands clear.

[urvashi]

Thanx a lot  ! In the budget equation you habe mistakingly written x instead of y i got the same ans bt when housing is less than 250 why will the co sumer prefer lump sum transfer it give him hiher amount of other goods bt also lower housing expenditure maybe im getting confused

[knowpraveen]

If the housing expenditure goes below 250, it is sensible for him to opt for the lump sum transfer as he will now have a fixed amount of money lets say A<250 to spend on the housing and 250-A to spend on other goods. For rupee to rupee subsidy, A is the only amount which is subsidized whereas in the second case he would be getting a lump of Rs. 250. So, going by intuition for Housing Amount < 250, it is logical to opt for the new proposal. =)

[urvashi]

Thanks

[Dr. Strange]

It is always preferable to use the lump sum subsidy.

In first case,the person could spend any amount on housing and M/px amount on other goods.However he chose rent =250. This shows he prefers (M/px,250) over (M/px,H).   0<H< infinity(as no limit is given).

In second case (M/PX,250) is always available to him.New budget equation is PX*X + R=M+250
The part of budget line to the left  of (M/PX,250) was available to him in first case and he didn't choose them.
so either he will choose a consumption on right side of (M/px,250) or he will be indifferent.

Hence lump sum subsidy is always better or equal to rupee by rupee subsidy.

[knowpraveen]

Draw the budget equations and you will get two cases here, also based on revealed preference. Try to explain your answer by logic here, if lump sum transfer is better for all cases what if the housing amount is greater than 250.

[Dr. Strange]

He could have afforded housing greater than 250 in first case but he chose 250. Hence it is revealed that 250 is optimum housing amount for him.He wont choose housing greater than 250.

[knowpraveen]

Okay! That sounds logical man. Never thought of that. Now could you please explain the revealed preferences on a graph man. Thanks for that. =)

[varnika1880]

In the budget line case if u assume the price of housing not to be numeraire..  then I believe it not always possible to consume the original bundle

[Dr. Strange]

B is original consumption i.e (m/px,250)
Point B is revealed preferred over all regions to left of ABC.
Hence when he is offered lump sum subsidy he will either choose B or any point on Line BE.

[knowpraveen]

Could you please explain how it is possible, Dr. Strange or Varnika. I didn't understand. Kindly write a procedural explanation. Thanks.

[Dr. Strange]

See  the graph. Point B is always available .

If he has M+250 rupees he can always spend 250 on housing and M on other goods.