Question

For Questions 11 to 20, consider a house hold that consume only two goods-food and "other goods" that are each normal goods The income of the house hold is S100, the price of food is S5 and the price of "other goods" is S10. The house hold always consumes 25 percent of its income (or income plus value of coupon) on food and 75 percent on other things. The government is considering four policies designed to raise food consumption. -A transfer of S20 in cash to the household -A coupon that can be used only to consume 4 units of food - A subsidy of S2/unit on food I. How much food and "other goods" does the household consume in the initial situation? a) 25 food, 75 other goods b) 5 food, 10 other goods c) 20 food, 10 other goods d) 5 food, 7.5 other goods 12. If the government gives a transfer of S20 in cash to the household, how much food and "other goods does the house hold consume? a) 5 food, 7.5 other goods b)9 food, 7.5 other goods c 6 food 9 other goods d) 30 ood, 90 other goods 13. If the government gives a coupon for 4 units of food to the household, how much food and "other goods does the household consume? a) 5 food, 7.5 other goods b)9 food, 7.5 other goods c) 6 food 9 other goods d) 30 food, 90 other goods 14. Between the $20 transfer and the coupon for 4 units of food, under which policy does the household consume more food? a) Transfer b) Coupon c Neither, consumption of food is the same d) Cannot be determined

Answer 1

11. Since 25 percent of income is spent on food, it means that0.25*100 which is $25 I spent on food. As one unit of food cost $5, total food that can be bought from $25 will be 25/5= $5

While $75 to be spent on other goods where a unit costs $10, implying that total units of other goods will be 75/10= 7.5 units of other goods. (d)

12. Now, if the government gives a cash transfer of $25, the total income will now be $120, out of which 0.25*120= $30 would be spent on food and $90 on other goods. The total unit of food and other goods would thus be 30/5= 6 and 90/10= 9 respectively. (c)

13. When 4 units of food coupons are provided to a household, the total consumption will then be 4plus the units costing 25% of income or 5. So, the total consumption will be 9 units of food. The remaining $75 to be spent on other goods would be able to buy 75/10= 7.5 units of other goods. (b)

14. With $20 transfer, the consumption is 6 (from 12), and it is 9 (from 13) with the coupon. Since the consumption of higher in case of the coupon, thus the policy of coupon should be chosen. (b)