Question:

Consider a food voucher programme, a welfare program for the poor. Suppose that a consumer earns £200 per week, and consumes two goods: "Food" (QFood) and "Other Goods" (QOthers). Suppose that the price of Food is £2 per unit (Other Good is measured in monetary term, so the price of one unit is £1). The government is considering offering a subsidy programme using food voucher, which will make Food more affordable.

2a) Using an indifference curve analysis, show below an initial equilibrium point (QFood, Qothers) without any subsidy programme. (No need to pick specific numerical values for (QFood, Qothers), but indicate your equilibrium point clearly in the graph.) (3 marks)

Suppose that this consumer can receive a food voucher (a coupon) that allows her to buy 40 units of Food per week (the voucher cannot be used to buy "Other Goods").

2b) Show in the above graph the effect of a subsidy programme which gives each household this food voucher. Show the likely effect of this policy in the above graph. Explain briefly below the changes that you introduced to the graph. (5 marks)

2c) Not all families with the likewise income level will necessarily increase their consumption of Food as a result of this programme. Indicate such a case in the above graph, and explain briefly below. (4 marks) ***

Suppose now that, instead of the food voucher, the government will offer families a straight income subsidy of £80 per week.

2d) Show graphically below how the budget line of the same consumer (whose income is £200 per week) will change, as a result of the new policy (of income subsidy), compared with the case of the food voucher. Explain briefly below the changes that you introduced to the graph. (4 marks)

2e) Consumers may prefer one policy over the other, depending on their preferences. Using the above graph, show your argument. Explain your graph briefly below. (4 marks) ***

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Deliverable: Word Document