--%>
Assignment Help - homework help

Utility with food coupons

Question:

In Vancouver the Salvation Army encourages people to make food voucher donations to panhandlers instead of simply giving them cash. You can buy a food voucher for $5 and give it to a panhandler who can use it to purchase food. The Salvation Army says it's a way to ensure that a gift actually goes to food, rather than alcohol or drugs. Suppose a panhandler (PH) consumes two goods: food (F) and drugs (D). The PH has a utility function u = F0D1. This can also be written as u= D. Answer and explain the following using a diagram which is completely labeled.

(a) If drugs and food each cost $1 per unit, and the PH has $20 is cash, how much D and F will he consume.

(b) If instead the PH has $10 in cash and $10 in food vouchers, how much D and F will he consume?

(c) Is the PH better off with $20 in cash, or with $10 in cash and $10 in food vouchers.

Solution:

a)

u = D

PH will only consume drugs. This is because food does not give him additional utility. Whether he consumes 0 units or 1000000 units of food, it does not make a difference. Therefore, he will spend all his income on drugs. He will consume 20 units of drugs.

758_additional utility.png

b)

In this case, he will consume 10 units of drugs, and he is indifferent between consuming 0 units or 10 units of food.

968_Utility with food coupons.png

c) Utility with $20 cash = 20

Utility with food coupons = 10

Therefore, PH is better with $20 cash.

   Related Questions in Business Economics

  • Q : Market system is a profit-and-loss

    Evaluate and explain the statements: “The market system is a profit-and-loss economy”

    		•
  • Q : Real rate of interest Question: Hubbard

    Question: Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest.   How much control does the Fed have over this longer real rate?

  • Q : Determine the Relative Price of given

    When turkey is $1 per pound and the relative price of ham to turkey is 2, in that case a pound of ham costs: (i) 50 cents. (ii) 1/2 pound of turkey. (iii) 2 pounds of turkey. (v) 12 pesetas. (iv) 5 euros. How can I

    		•
  • Q : Allocative Mechanisms-market based

    The market-based economic system: (1) Appears to be ‘natural’ as it has existed in all societies. (2) Has dominated the economic relationships in United States since from the year1492. (3) Guided resource allocation in middle ages. (4) Is

    		•
  • Q : Determine the productively efficiency

    To be productively efficient, a country should: (w) maximize the satisfaction attainable from its budget. (x) be concerned only with macroeconomic analysis. (y) concentrate on removing scarcity. (z) maximize the value of output produced through specif

    		•
  • Q : Distinguish between allocative

    Distinguish between allocative efficiency and productive efficiency. Give an illustration of achieving productive, but not allocative, efficiency?

    		•
  • Q : Comparative Advantage-Mutual exchange

    Mutually beneficial exchange is probable whenever relative production costs vary previous to trade, is a manner to state the law of: (1) Positive profits from trade. (2) Comparative benefit. (3) Specialization and Division. (4) Purchasing power parity

    		•
  • Q : Define Average cost and Marginal cost

    Briefly explain the term Average cost and Marginal cost?

    		•
  • Q : Problem on private resource ownership

    Relative to most of the other countries, the United States encompasses historically relied more greatly on: (1) Public resource ownership and private income distribution. (2) Decentralized decision making and private resource ownership. (3) Exports of textiles, automo

    		•
  • Q : Eco Quantity TR TC 0 $0.00 $10.00 1

    Quantity TR TC 0 $0.00 $10.00 1 $150.00 $30.00 2 $290.00 $50.00 3 $420.00 $80.00 4 $540.00 $120.00 5 $650.00 $170.00 6 $750.00 $230.00 7 $840.00 $300.00 8 $920.00 $

    		•