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Question from Past Microeconomics Qualifying ExamEdit

Spring 2005 - Section II, Question one, George Mason University

Analyze the impact of the food stamp program using the theory of the consumer. Suppose the government gives low-income individuals the right to $100 worth of food per month. What will be the impact on recipients' food consumption if this right cannot be sold? How does your answer change if the food stamps can be sold?

AnswerEdit

Food Stamps

Food stamps cannot be sold: Depending on the individuals utility curves it might either consume more food and more of all other goods, or just more food, or it might not consume more of either. It's consumption of all other goods is however limited to the amount it could have bought with its original income if it would not have spend any money on food, i.e. the intersection of the original budget line with the vertical axis. It is therefore uncertain whether the individual will end up on a higher indifference curve, since the $100 in food stamps are not equivalent to $100 in cash.


Food Stamps resale

Food stamps can be sold:The individual is not limited to spending the food stamps on food, because of the possibility of selling the food stamps for cash. The food stamps are therefore equivalent to a rise in income of $100.


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