--%>
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 : Millions of economic resources tend to

    What explains why millions of economic resources tend to get arranged logically and productively rather than haphazard and unproductively?

    		•
  • Q : Why Trade barriers hurt American

    Why Trade barriers hurt American consumers?

    		•
  • Q : Profit in perfect competition leads to

    An increase within demand for "green-certified" products will ________ a firm's economic profit, and the raise within costs to have a product certified like "green" will ________ a firm's economic profit: w) increase; increase x) increase; decrease y)

    		•
  • Q : Determine the lowest average wages

    Consider a huge group of identically smart and strong industrious workers. All else identical, Adam Smith would predict such that the lowest average wages would be earned through the workers who were in the work that: (1) had the leas

    		•
  • Q : Why private goods are produced through

    Why private goods are produced through the market?

    		•
  • Q : Problem on Infrastructure The state

    The state legislature has voted to develop a grant-in-aid policy to try and induce local communities to devote more resources to improving their infrastructure. Town O = Has an operating budget of $2 million; currently spends a tot

    		•
  • Q : Market system automatically adjustment

    Concept of Adam Smith that the market system automatically adjusts as when guided through an “invisible hand” most intimately resembles: (1) flows of electricity across the microcircuits within computer chips. (2) homeosta

    		•
  • Q : Risky forms of production to gain

    Entrepreneurs: (w) undertake risky forms of production to gain uncertain profits. (x) obtain interest payments for their services. (y) are usually overcompensated for their innovations. (z) receive virtually all their wealth by inheritance.

  • Q : Society decide its optimal point on the

    How does society decide its optimal point on the production possibilities curve?

    		•
  • Q : Use of human and material resources

    What are the merits of speciality in the use of human and material resources?

    		•