problem code : 090609MICRO

Posted by vishruti on Jun 09, 2009; 3:09pm
URL: http://discussion-forum.276.s1.nabble.com/problem-code-090609MICRO-tp3050024.html

A consumer has the following utility over childcare c and food f
U (c,f) = c^1/5 f^4/5

The price of childcare is pc = 2, the price of food is pf = 4 and income is I = 20

1. What is the consumer’s demand for childcare and food?

2. Suppose the government gives the consumer an income subsidy of S = 10. How
will the consumer allocate the subsidy in the consumption of goods c and f?

Suppose now the government decides to give an in-kind transfer to the consumer.
The in-kind transfer takes the form of 4 hours of childcare and 0.5 unit of food.
Assume that the transfer cannot be re-sold.

What are the new consumption levels after the in-kind transfer is given? What
is the level of utility attained by the consumer at this consumption level?

(source : MIT )