Question

1. Assume that Jones has the following utility function: U(C, O) = C^¼O^¾, where C indicates the quantity of cheese consumed, and O indicates the quantity of other goods. Jones faces prices Pc = 2 and Po = 1 for cheese and other goods, respectively.

1. Suppose Jones has an income of I = 300, How much Cheese and other goods would Jones consume?
2. In addition to Jones’ initial income, assume the government gives a cash transfer of $120 to him. How much choose and other goods would Jones consume now?
3. Suppose the government gives an in-kind transfer of 60 units of cheese to Jones as well, for which she cannot resell. How much cheese and other goods would Jones consume now?
4. Which program, the cash transfer or in-kind transfer would be preferred by Jones?

Answer 1