Question

Q11. Consider a family with a cash income of $1,000 per month. With food on the horizontal axis and income on the vertical axis, and assuming the price of food is $1:

(a) Illustrate the equilibrium of a family who spends 60% of their income on food.

(b) Suppose now this family is eligible for food stamps: It pays $200 per month to obtain $600 worth of food. Draw this family's new budget constraint.

(c) Illustrate the family’s new equilibrium if they continue buying the same amount of food as before.

(d) Show graphically that this family may be better off if they were given $400 in cash instead. Do they buy more or less food?

Answer 1

K+y ooo XPood ncome loo0 B-C 811) Income 90 x*= .6X1000 600 000 y*= 400 Pon 600 Food X. NewSncome M- l000-200 NOCO (600,800) 008 800 cNouw New m as X-600, as in patt a)can at B. NowBC. 600 800 1400

New sc (when M=1400) Now Neaw Inome Me loo0+ too 4 -1400 New BC Xty= 1400 thus wth cash tounsfe, A consumer hn can attain Righer uiy 4C with fivd Atamnp Level, by iche c on Thus they buy less Food & are bettes XL