Kay lives in a city where housing costs $1 per square foot. They have a monthly budget of $1,000, of which they decide to allocate $500 to rent a 500 sqft. apartment and spend te other $500 on consumption. A generous relative offers Kay a deal on a 400 sqft. apartment for only $200 per month, which they accept. What is the equivalent variation of this transfer for Kay, in dollars per month? (Select one) (a) More than $300: Kay gets utility from both consumption and the new apartment. (b) $300: That is how much more Kay can consume with the new cost of rent. (c) $250: That is how much less Kay’s old bundle would have cost at the new prices. (d) Between $0 and $250: Kay would substitute away from her old bundle at the
4. Kay lives in a city where housing costs $1 per square foot. They have a monthly budget of
$1,000, of which they decide to allocate $500 to rent a 500 sqft. apartment and spend te
other $500 on consumption. A generous relative offers Kay a deal on a 400 sqft. apartment
for only $200 per month, which they accept. What is the equivalent variation of this transfer
for Kay, in dollars per month? (Select one)
(a) More than $300: Kay gets utility from both consumption and the new apartment.
(b) $300: That is how much more Kay can consume with the new cost of rent.
(c) $250: That is how much less Kay’s old bundle would have cost at the new prices.
(d) Between $0 and $250: Kay would substitute away from her old bundle at the new prices.
(e) $200: That is the additional cost of Kay’s new bundle at the old prices.
(f) Between $0 and $200: Kay may prefer to substitute away from her new bundle at the
old prices.
(g) $100: That is the differential cost of the new apartment at the old prices.
(h) $0: The new apartment is like an inframarginal transfer to Kay.
(i) We would need to know Kay’s marginal rate of substitution to calculate the EV.
(j) We cannot quantify the value because utility is ordinal, not cardinal.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
