Question

(a) Suppose that a given corporation opts to subsidize $75 of the cost of optometrist visits for its employees and that the average visit to the optometrist costs $150. Use an indifference curve diagram to show the cost of the subsidy to the employer. (You will need to draw the diagram, photograph your diagram, email it to yourself, and copy-and-paste it into the space below. Please type the explanation.)

(b) Show that the average employee is better off by their own preferences if they are paid a lump sum in the amount of the excise subsidy. Be sure to label your diagram clearly. (One picture should suffice. You can simply alter the diagram you have drawn above.)

Answer 1

a)optometrist cost is $150 and if subsidy is given then it will cost $75 to employees at per visit.

it means that the budget line of employees will shift to higher ic curve.

in this pe is the price that is given as subsidy and increase the budget of employees

b)suppose that the average employee is better off by their own preferences if they are paid a lump sum in the amount of the excise subsidy

which means that if given lump sum then they can patternize accoding to their preference and can switch to the urgent need but if they are given specific something then then they are bound to that specific subsidy changing budget only to increase in only one constraint but if lump sum given then whole budget will increase.

as mention in the above graph if lumsum then shift of budget line from PL1 TO EL2 but in not then PL1 TO PL2.