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

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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
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2 Lava Lamps Composite Good 0 1.5 300 A IC 1 1 Composite goods allow an  economist to study choices  revolving around 1 good
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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…..
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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
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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
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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
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