Question

4. a. Mr. Wright is a clothing salesman. He is paid $500, but his employer requires him to spend at least $100 of his income on clothing. Show that his utility level is lower than it would be if he could freely allocate his income between clothing and all other goods. Assume that Mr. Wright would choose to spend less than $100 on clothing if his employer did not impose the requirement. b. What must be true about Mr. Wright's marginal rate of substitution between clothing and other goods at his “restricted” consumption bundle. c. What implications does this problem have for determining whether or not cash or in-kind (e.g., food stamps, public housing, free medical care) transfers are preferable as a means to improve the well-being of lower income persons?

Answer 1

Answer:

4.

a)

The figure underneath gives the spending limitation of the individual W. The indifference curves meaning the degree of utility is given by U1, U2 and so forth. The indifference curves have regular shape and properties.



The ab segment  of the budget line is off-point of confinement to W as he can't expend inside this segment. This is on the grounds that, he can not expend under 100 units of clothes( we asume the cost of fabric is 1). For this situation the equilibrium happens at b, where he expends 100 units of clothe and O' measure of different products. The point b , then again, doesn't amplifies utility. This point isn't the juncture point between IC and spending line.

In the event that he isn't compelled, he ought to have devoured at a point where the IC is digression to the spending line. With the end goal that E. At E the IC indicates a higher utility than it was at b. The consumer moves from a lower IC U1 to higher IC U2.

b.

At the confined utilization bundle the marginal rate of substitution isn't equivalent to the value proportion of the garments and different products group. As now the iC cuts the spending line or budget line from beneath. Now the slope of IC is compliment than slope of budget line. That is the rice ratio is not exactly the substitution rate. This suggests to arrive at equilibrium the fabric utilization needs to diminish and other good consumption needs to increment.

c.

The above exchange recommends that the cash transfer is superior to in-kind exchange to improve the prosperity of the low salary families or individual.