1 economic quesition

Assignment 7

Eco 421

1. Consider the problem of a utility maximizing consumer with utility function given by,

𝑢(𝐻, 𝑂) = min⁡(𝐻, 𝑂)

Where H represents the consumption of Housing (in square meter) and O represents the consumption of

other goods and services. For simplicity, we normalize the price of O to $1/unit. The consumer travels to

the CBD, where jobs are located and travel cost is $20/km. The consumer lives 5 km away from the CBD

and pays $14/square meter for housing.

a. (3 points) What is the housing consumption of the consumer?

b. (1+2+4=7 points) Suppose the consumer shifts to a location which is 2 km away from the CBD.

What happens to his housing consumption? Show graphically with proper labelling. Calculate the

price of housing at the new location.