Question

agetline between (5) Suppose the Federal Government decides to provide assistance to the poor in your city. It issues $200 worth of food stamps to such individuals. The food stamps are coupons that can be exchanged for $200 worth of food at the grocery store and they can be used only by the person to whom they are issued Dew your budgetline between "food" and all other goods" both before and after the food stamps are issued. Assume the price of food - $2.00 and the price of all other goods" = $1.00 and the individual's initial income is $200. (Place food on the horizontal axis). Suppose the individual maximizes his satisfaction by consuming 200 units of other goods and 100 units of food. Draw a COVEX DC on the diagram to illustrate this situation. ANS: food - 52.00 and the pricerizontal axis). Suppos of food. Draw a b. Suppose the government decides to allow individuals to spend the $200 of food stamps money on any good they desire. Show that individuals will be better off on your diagram above. Explain your results clearly to get full marks.

Answer 1

Initially, the consumer has its montly income giuen as $200.- Pouce of food - $2.00_ $ pource of all ather goods' = $1.00 so the Budget constraint is given as: - Pix&x + PyQy=M. UUUUUUUU 260F) + ICQ.NE) = 200 _2QE + QNE: 200. So if Qro 100 es then. One 200 10 ou of Non Cyrood 200 loo la DE 200 Qty of food 100

OTQty of Non food item Osiginal budget lineis quen as Blog 200 Now; consider a situation where oso100 gaueinment p uide Food Stamps Oh of $ 200 to a consumen:_So these Stamps can be used in the masket only to purchase food items 200 notany other item. Therefore, at Go Foodiem qiuen mauret psice of food $2; Now the new Budget line is given consumer can purchase 100 units as Bisl' in queen. At point B; of food items consumey uses Ispends all his Po income to purchase non fooditems __$200 worth of food stamp P So; without using his_income at Doice of food = $2 P food items; now he can purchase. _so; _200 = 100 units of food item. PS$100 units of food by spending all his income on non food items. As the result the link akisesuat k This will going to altex, our Budget_! P point. After k ; if consumex wants constraint. Let us assume an Icy at I to purchase food items; he has to point E; Where can maximize his_a! ps spent some money from his income. utility <-"tangent toel) 2

That is why weget downward Sloping Budget line portion kl. Now at new budget line BKL consumer can maximize his utility by consuming 200 units of Lother goods and 100 units of food Casperouided in the questions? aty of Non Food 200 t 100 B IK 1C2 " Qty of Food & 100 200 Ic_will_be_tangent to budget lines Lat kinkgu en as k

- If the food stamp can now be used to purchase other items that aconsumer desince. So; this is Similar to a lump sum cash subsidy o $200 p9louided by government. under this condition U. Qty of non food - 200 Cic. 1C3 IC2 > > 100 200 Qty a food Now; the new budget line is a straight 2 queen coloured line given as bik'.

As compared to E; where he : maximize his utility whem budget constraint is Bl. Now; a consumer can purchase same amount of food with more units of other goods so he is better off at E'.' Because • new budgetline is parallel Shyled outward as compared with BL; he has more of both the goods to eat at BKL': So; consumeris definitely better off As compared to food stamp only usea to purchase food faitemos; point E is not available in that situation. Because at this situation more of nontood item cannot be purchased