Question

51. From the standpoint of a recipient, a cash transfer is always as good and often better than an in-kind transfer of equal dollar value. Using indifference curves, show an example where a cash transfer is preferable to the recipient compared to an equal-valued in-kind transfer. 52. Suggest three possible policies to deal with future social security funding issues. Very briefly explain each option. 53. Explain the problem of asymmetric information as it impacts the health insurance market.

Answer 1

Solution: 51.

Suppose the in-kind transfer is of food. There are two scenarios: (1) If the consumer consumes more than the amount of food provided in in-kind transfer. (2) If the consumer consumes less amount of food than in-kind transfer when provided with cash transfer.

Scenario 1. If the consumer consumes more than the amount of food provided in in-kind transfer:

In above graph, the initial budget line is B1L1 and after in-kind transfer, the budget line changes to B1CL2. If the consumer would have been given cash transfer, the budget line would be B2CL2. Since the consumer consumes more than the amount of food provided in in-kind transfer, he would be indifferent between in-kind transfer and cash transfer. This is an indirect method of inducing consumers to spend on non-food items. Here the consumer consumes higher amount of both of food and non food products.

Scenario 2. If the consumer consumes less amount of food than in-kind transfer when provided with cash transfer:

In above graph, the initial budget line is B1L1 and after in-kind transfer, the budget line changes to B1CL2. If the consumer would have been given cash transfer, the budget line would be B2CL2. Here with the cash transfer, the consumer shifts to a higher indifference curve. Thus he definitely prefers cash transfer over in-kind transfer. The consumer is on IC3 with cash transfer and would be on IC2 with in-kind transfer. Here the consumer substitutes other good for food. Thus he consumes more of other good and less of food and goes on higher indifference curve.

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