Re: ISI PEB (Economics), 2014 ANSWERS 1 TO 5..

Posted by dhruv on Apr 16, 2015; 8:01am
URL: http://discussion-forum.276.s1.nabble.com/ISI-PEB-Economics-2014-ANSWERS-1-TO-5-tp7595987p7596213.html

For Q. 6, with rupee to rupee subsidy the Lal family's budget line will be parallel to x-axis and will cut the y-axis at M, where, M is their income and housing expenditure is on x-axis while other expenditure is on y-axis. With new policy their budget will be : x + y = M + 250. Assuming convex preference, the budget with earlier policy will be able to afford goods on higher indifference curve as compared to new policy, also this follows from monotonicity of preferences. But if the family is neutral to housing expenditure then they may be indifferent between old and new policy. The optimal consumption may change if the optimal solution through tangency comes at the point other than (250,M).