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Unformatted text preview: PADP 6950: Founda1ons of Policy Analysis Consumer Choice PRACTICE Angela Fer1g, PhD Policy 1: Food Stamp Program Under this 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 Step 1: Choice without FSP Budget line: 1000 = 10F + 20G U1lity func1on: U = F*G where U = 1250 1. Draw out both lines on one graph 2. Find the op1mal bundle without the FSP 2 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 aYainable u1lity is now 2112.5 2. Add on the new indifference curve 3. Find the new op1mal bundle with the FSP 3 Evaluate FSP 1. Did the food expenditure for this individual go up by $300? Is this desirable or not, from a policy perspec1ve? 2. Would this individual be beYer off if the FSP was a cash benefit program instead? Let's look at a different individual with different preferences Budget line: 1000 = 10F + 20G (as before) U1lity func1on: (G+10)*(F+100) = 6050 1. Draw out both lines on one graph 2. Find the op1mal bundle without the FSP 3. Add the budget line with the FSP 4. What is the op1mal bundle if the U=7812.5? a) Is this aYainable with the FSP? b) Would it be aYainable with a cash benefit program? 4 Policy 2: Public Housing Under the public housing program, the government offers eligible households a publicly-owned/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) 5 Ques1ons Without PH program: Budget constraint: 1000 = 0.5*H + 20G H=square feet of housing G=other goods With PH program: U1lity func1on of A: UA = sqrt(H) + G where U = 60 U1lity func1on of B: UB = 2.2*sqrt(H) + G where U = 98 Since the program offers the household a fixed quan1ty of housing, it adds a single point to the set of budget opportuni1es; 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? 6 ...
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This note was uploaded on 01/18/2012 for the course PADP 6950 taught by Professor Fergi during the Spring '11 term at University of Georgia Athens.
- Spring '11