#27) For the following problems: Consider a household that consume only two good
ID: 1211654 • Letter: #
Question
#27) For the following problems: Consider a household that consume only two goods – food and “other goods” – that are each normal goods The income of the household is $120, the price of food is $10 and the price of “other goods” is $20. The household always consumes 50 percent of its income (or income plus value of coupon) on food and 50 percent on other things. The government is considering three policies designed to raise food consumption. -- A transfer of $40 in cash to the household -- A coupon that can be used only to consume 4 units of food (and costs government $40) -- A subsidy of $4/unit on food
--- 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) 80 food, 80 other goods b) 14 food, 20 other goods c) 14 food 5 other goods d) 10 food, 3 other goods e) Not Given
--- Between the $40 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 [Note: No answer e]
--- Under which policy does the government spend the least amount of money towards the food consumption of this household? [Note: The initial situation is not included in the comparison] a) Transfer of $40 b) Coupon worth $40 of food c) Subsidy of $4/unit d) None – they all cost the same e) Cannot be determined
--- If the government wants the best combination of spending as little money as possible and raising the food consumption of the household as much as possible, which policy should it adopt?
Please give a descriptive explanation/formula/etc. for finding your answers. Thank you
Explanation / Answer
d) 10 food, 3 other goods
b) Coupon
b) Coupon worth $40 of food
The best policy of raising food consumption and least expenditure is that governemnt should use coupns because food coupns fullfill the cause directly and all the money included in coupon will be utilised for the food consumption.
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