Principles of Economics- Mankiw (5th) 473

Principles of - CHAPTER 21 THE THEORY OF CONSUMER CHOICE 487 between food and nonfood consumption however he pleases By contrast if the government

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CHAPTER 21 THE THEORY OF CONSUMER CHOICE 487 between food and nonfood consumption however he pleases. By contrast, if the government gives Paul an in-kind transfer of food, then his new budget constraint is more complicated. The budget constraint has again shifted out. But now the budget constraint has a kink at $1,000 of food, for Paul must consume at least that amount in food. That is, even if Paul spends all his money on nonfood consump- tion, he still consumes $1,000 in food. The ultimate comparison between the cash transfer and in-kind transfer de- pends on Paul’s preferences. In panel (a), Paul would choose to spend at least $1,000 on food even if he receives a cash transfer. Therefore, the constraint im- posed by the in-kind transfer is not binding. In this case, his consumption moves from point A to point B regardless of the type of transfer. That is, Paul’s choice be- tween food and nonfood consumption is the same under the two policies. In panel (b), however, the story is very different. In this case, Paul would pre-
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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