Let’s assume there are only two goods: food and money. The price of food is $4 per unit and the price of money is $1 per unit. The city of Austin is considering two types of social programs to help low income people. Under Program A, a low income person is given the option to buy $120 worth of food coupons for $80. These coupons can be used to buy $120 worth of food. Under Program B, a low income person is given directly $120, as cash.
a. Draw the budget set of a low income person with income $800 without any social program, and under each of the two programs. (3 budget lines)
b. If only Program A is offered, would any family refuse to use the option to buy coupons? Explain what kind of preferences would lead to refusal.
c. Since it will cost the government the same as Program B, would you recommend giving such families a cash transfer of $120 instead of food coupons? Explain why.