Budget constraint for the individual with the composite good

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Reference no: EM13886520

An individual has an income of $1000 per month with which they buy the composite good with a price of $1 and food with a price of $2/unit of food.

(a) Draw the budget constraint for the individual with the composite good on the y-axis and food on the x-axis.

(b) Now assume that the government gives the individual food stamps worth $100. This is money that can only be spent on food. Draw the new budget constraint for the individual on your graph from part a.

(c) Assume instead that the government had given the individual $100 in cash. Draw the new budget constraint for the individual on your graph from part a.

(d) Would the consumer prefer to get $100 in food stamps or $100 in cash? You need to justify your answer thinking through the possible optimal consumption bundles for the consumer.

Reference no: EM13886520

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