Suppose the government implements an income support program with the intention of making sure residents are able to purchase sufficient food. The government pays a cash benefit to all individuals with incomes less than $1000 according the following formula: cash benefit (CB) = $200 – 0.2*(earned income(I)) Households spend all of their income on food (F) and other goods (X). The price of food and other goods are normalized to 1. A households budget constraint is F + X = CB + I Households have the following preferences: U = 0.25*ln(F) + 0.75*ln(X) Refer to Scenario 3 Suppose instead of cash, the government benefit is in the form of food stamps, or vouchers, that must be spent on food. How much does the household spend on food now?
Scenario 3
Suppose the government implements an income support program with the intention of making sure residents are able to purchase sufficient food. The government pays a cash benefit to all individuals with incomes less than $1000 according the following formula:
cash benefit (CB) = $200 – 0.2*(earned income(I))
Households spend all of their income on food (F) and other goods (X). The price of food and other goods are normalized to 1. A households budget constraint is
F + X = CB + I
Households have the following preferences:
U = 0.25*ln(F) + 0.75*ln(X)
Refer to Scenario 3
Suppose instead of cash, the government benefit is in the form of food stamps, or vouchers, that must be spent on food. How much does the household spend on food now?
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