Question

Scenario 3 Suppose the government implements an income support program with the intention of making sure residents are able to purchase sufficient food. The government pays a cash benefit to all individuals with incomes less than $1000 according the following formula: cash benefit (CB) = $200 -0.2* (earned income()) Households spend all of their income on food (F) and other goods (X). The price of food and other goods are normalized to 1. A households budget constraint is F+X = CB + 1 Households have the following preferences: U = 0.25*In(F) +0.75*In(X) Question 47 1 pts Refer to Scenario 3 Suppose a household has earned income of $300. How much does this household receive in benefits? Answer in dollars and do not enter a '$' sign. Question 48 1 pts Refer to Scenario 3 How much does the household spend on food? Answer in dollars and do not enter a 'S' sign. Question 49 1 pts Refer to Scenario 3 Suppose instead of cash, the government benefit is in the form of food stamps, or vouchers, that must be spent on food. How much does the household spend on food now?

Answer 1

Answer 47 : Cash Benefit = 200- 0.2×300

= 200 - 60 = 140

Cash benefit received will be $140.

Answer 48: Total U = $460 (300+160) =( I+C)

U= .25f + .75x

Hence income spent on food will be

460×0.25=$115

Answer 49: In above case $140 will be in form of food voucher or food stamps instead of cash benefits that will be spent whole on food. And out of $300 as income $75 will be spent on food according to above given preference that is U= 0.25 F + 0.75 X

Total income is $300 and spend on food (0.25) will be $75 .  

Hence total income spent on food in this case will be $75 (proportion from income)+ $140 (food stamps or food vouchers provided by government) = $215.

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