chrissy purchases food (f) and other goods (y) and has the utility function U(f,
ID: 1239681 • Letter: C
Question
chrissy purchases food (f) and other goods (y) and has the utility function U(f,Y)-F*Y with Muf=y and Muy=f. her income is $12. the price of a unit of food is 2 and the price of other goods is 1.
A. how many units of food does she consume when she maximizes utility?
B. the government has recent completed a study suggesting that fora health diet every consumer like chrissy a cash subsidy that would induce her to buy F=8. how large would the cash subsidy need to be? show her optimal basket iwth the cas subside on an optimal choice diagram with f on the horizontal axis and y on the verical axis.
C. as an alternative to the cash subsidy in part (b) the goverment is also considering giving conusemrs like chrissy good stamps, that is, vocher with a cash value that can only be redeemed to purchase food. verify that if the goverment give her vouchers worth $16 she will choose F=8. illustrate her optimal choice on an optimal choice diagram. you many use the same graph in part (b)
Explanation / Answer
from the data 12=f*2+y*1 U=F*Y at y= 6 we have maximum utility so A> at max utility she can buy 3 units of food b>cash subsidy = 20 c>vouchers can be sufficient of worth 10$ to induce her to buy 8 units of food if govt issues 16$ then she will buy 8 units of food and 12 units of other goods cheers:)
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