Principles of Economics- Mankiw (5th) 472

Principles of Economics- Mankiw (5th) 472 - 1 1 2 (with...

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486 PART SEVEN ADVANCED TOPIC (perhaps by issuing him food stamps) or simply give him $1,000 in cash. What does the theory of consumer choice have to say about the comparison between these two policy options? Figure 21-17 shows how the two options might work. If the government gives Paul cash, then the budget constraint shifts outward. He can divide the extra cash Cash Transfer In-Kind Transfer Nonfood Consumption 0 $1,000 Cash Transfer (a) The Constraint Is Not Binding (b) The Constraint Is Binding 0 $1,000 In-Kind Transfer Food A B I 2 1 BC 1 2 (with $1,000 cash) A B C 2 1 1 2 (with $1,000 food stamps) Food Nonfood Consumption Nonfood Consumption 0 $1,000 0 $1,000 Food A B 2
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Unformatted text preview: 1 1 2 (with $1,000 cash) A B 2 1 1 2 (with $1,000 food stamps) Food Nonfood Consumption 3 Figure 21-17 C ASH VERSUS I N-K IND T RANSFERS . Both panels compare a cash transfer and a similar in-kind transfer of food. In panel (a), the in-kind transfer does not impose a binding constraint, and the consumer ends up on the same indifference curve under the two policies. In panel (b), the in-kind transfer imposes a binding constraint, and the consumer ends up on a lower indifference curve with the in-kind transfer than with the cash transfer....
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