Question - The space below shows the budget constraint between food (F) and non-food consumption (X). This household has $800/month to spend on the two goods, the price of food = $4/unit and PX = 1. Label both axes and both intercepts. Current food consumption = 150 units/month.
a. The government introduces a food stamp program that gives this household $300 worth of food stamps. Show the effects of this in the above budget constraint. Be sure to indicate the value at any new intercepts, kinks, etc.
b. What does the income effect predict will happen to the level of food consumption? Explain.
c. What does the substitution effect predict will happen to the level of food consumption? Explain.
d. Using appropriate arguments, justify the introduction of a food stamps program.
e. Relative to the size of the subsidy, what is your prediction regarding the increase in food consumption of this household? Explain. What information is needed to make an exact determination?
f. If you offered the above household a lump-sum cash grant = $200/month to give up their food stamps, would they agree to this deal? Explain.