Problem
• A food stamp policy is put in place in a state. For our representative consumer impacted by this policy, their initial income of $1,000 is supplemented by a cash value of food stamps of $200. The initial budget constraint is , where f is food, o is all other goods, and the two prices are subscripted by their commodity. The price of food is $20 per unit, the price of other is $10 per unit.
• Draw the original budget line and the budget line after the food stamp policy is implemented.
Representative McPeak is outraged to find out recent studies indicate that spending on other goods went up by 15% following the implementation of the food stamp policy. He says this shows that there is mass corruption in the administration of the program and the program should be abolished since it is being misused. Illustrate for him on a graph why increased spending on other goods as a result of the policy could occur for reasons other than corruption.