Econ 281 Chapter4c - 1 Composite Goods In reality, people...

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Unformatted text preview: 1 Composite Goods In reality, people consume more than one good Economists often want to study one good by graphing that good on the x axis and ALL other goods on the y axis The good on the Y axis is a COMPOSITE GOOD with default price P y =1 2 Lava Lamps Composite Good 1.5 300 A IC 1 1 Composite goods allow an economist to study choices revolving around 1 good 3 Composite Goods Coupons vrs. Cash Often governments consider equilibrium consumption of goods (such as essentials food etc) to be less than optimal Governments then have 2 main options to increase consumption of these goods: vouchers/coupons or cash subsidies Cash subsidies are administratively easier but may not be optimal.. 4 I/P h Food (units) Composite good, units F A F Min Example: Consider a situation where an individual consumes F a food, yet the government considers the minimum food an individual needs as F Min A I 5 I/P h Food (units) Composite good, units F A F Min One option is to offer a cash subsidy to increase food consumption. However, some consumers will spend some of this cash subsidy on other goods (ie: drugs) A I (I+S)/P h I+S B 6 I/P h Food (units) Composite good, units F A F Min In order to limit the increase in composite goods, the government can issue food vouchers instead, resulting in the new yellow kinked budget curve A I (I+S)/P h I+S B I+V (I+V)/P h C 7...
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Econ 281 Chapter4c - 1 Composite Goods In reality, people...

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