Question

The McCawber family is poor and they spend $100 per week on food

and $50 on other things. A new welfare program has been introduced that gives them a

choice between receiving a grant of $50 per week that they can spend any way they

want, and buying any number of $2 food coupons for $1 apiece. They are not allowed

to resell these coupons.

a. Suppose the price of food and other things are both $2 per unit, draw the budget

constraint and label the original consumption as point C.

b. On the same graph, draw the budget constraints for both welfare program options.

c. If food is a normal good, which option should the McCawber family choose?

Answer 1