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Unformatted text preview: PADP 6950:
Foundations of Policy Analysis Consumer Choice
PRACTICE r :c , '
1':!‘’) fill:
3‘41:le (.x.) , ."'ili,‘ Policy 1: Food Stamp Program  Underthis program, the eligible household
receives food stamps (worth say, $300 dollars)
that can be used only for food expenditures ° Let’s examine the effects of this program on
consumer choice using numbers and graphs 1/24/11 Step 1: Choice without FSP Budgethne:1000==10F4ZOG Utility function: U = F*G where U = 1250
1. Draw out both lines on one graph 2. Find the optimal bundle without the FSP (W WM— M‘ M ‘ PM 6 M Hamis [ooo=lOF+Q.OC9 Fer—12,50
looowlOF220Ca 6:12.50
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41> 30 /'D 26 ‘50 75100 F 1/24/11 Step 2: FSP changes the budget line  The FSP gives the individual $300 that can be
only used for food 1. Add the new budget line to your graph ° Assume that the highest attainable utility is
now 2112.5 2. Add on the new indifference curve
3. Find the new optimal bundle with the FSP 1/24/11 Evaluate FSP 1. Did the food expenditure for this individual
go up by $300? M0. WW top 1mg. /‘5 'Q 8(/0 £5750.
Is this desirable or not, from a policy perspective?
5/ WM 47/ M grow?
2. Would this individual be better off if the FSP
was a cash beneﬁt program instead? Ma WWW oééiiém 7% Let’s look at a different individual with
different preferences Budget line: 1000 = 10F + 206 (as before)
Utility function: (G+10)*(F+100) = 6050 1. Draw out both lines on one graph 2. Find the optimal bundle without the FSP 3. Add the budget line with the FSP 4. What is the optimal bundle if the U=7812.5?
a) Is this attainable with the FSP? /U0 6 7515 m. Mayc max 6:511 b) Would it be attainable with a cash beneﬁt program? % . : (G +M5XF+IOQ =coso
6110 = @060 PM Do 62¢ 78l35 ,[O
F+ioo ‘0 6D [DO ’30 F Policy 2: Public Housing ' Under the public housing program, the
government offers eligible households 3
publiclyowned/subsidized dwelling and charges a reduced rent (compared to what the
private market would charge for the same dwelling) ° The rent is determined by the local housing authority and calculated based on household
income (poorer households pay lower rent) Questions ° Without PH program:
 Budget constraint: 1000 = 0.5*H + 206
 H=square feet of housing
 G=other goods
— Utility function ofA: UA = sqrt(H) + G where U = 60
— Utility function of B: UB = 2.2*sqrt(H) + G where U = 98 ° With PH program: ~ Since the program offers the household 3 ﬁxed quantity of
housing, it adds a single point to the set of budget
opportunities; this point is above the household's budget line. — Assume the offered unit is 800 square feet for a rent of $350. Q1: Will A or B accept the unit offered? Q2: How would you describe the differences between A and
B’s preferences? Is the government providing subsidized
housing to the appropriate "type" of person? (20%?” a
we or? a 2M? +6 206 $1000 "0‘5H 1/24/11 A coil/{W 15 mm was?
QPAw/HM ...
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 Spring '11
 Fergi

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