Question
Asked Apr 6, 2019
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if the governement would like to induce a consumer to consumer a specific level of some good.

which would be cheaper a cash system or a subsidy system and why 

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Expert Answer

Step 1

Figure 1 illustrates the impact of subsidy to consumer and the money value of the subsidy.

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Step 2

In Figure 1, X axis measures the specific goods. Y axis measures and Y axis measures the amount of money. The curve UG indicates the initial level of budget line. Now the consumer can purchase the specific goods OG amount.

Government decides to provide the 50% subsidy to the specific goods. Thus, the budget line shifted from UG to UH. Consumer can buy the specific goods OH amount by spending the same amount of money. Thus, consumer can purchase double the quantity of specific good with the same level of money spending on the goods.

With the new budget line consumer is in equilibrium at point E where the budget line is tangent with the indifference curv...

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