ps4answerkey - food stamps than with the cash – being...

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Middle East Technical University Spring 2011 Department of Economics ECON 201 Erol Çakmak TA: Osman Değer PROBLEM SET 4 ANSWER KEY 1)
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2)
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3) a) b) c)
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d) e) Since the amount Calypso is willing to pay is less than the amount Fidel needs to be compensated, the trade will not occur. 4) a) This is one example of preferences that result in a strict preference for cash over food stamps. Any indifference mapping that results in choices of positive “other good” consumption will lead to a similar conclusion. (Alternatively, you could draw a single budget constraint with preferences that suggest that the individuals would prefer to spend less than $100 on food. Then, the individual is worse off with the
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Unformatted text preview: food stamps than with the cash – being forced to spend at least $100 on food limits his/her options and leaves him/her on a worse indifference curve than the one he/she could reach with $100 in cash.) b) If the consumer spends all his money on food, then he is indifferent between food stamps and cash—he can use both with equal ease at the grocery store. (Alternatively, you could draw a single budget constraint with preferences that suggest that the individual wants to spend at least $100 on food anyway. Then, the individual may use the food stamps for food and the “leftover” cash for other goods.) 5) A 6) A...
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This note was uploaded on 03/22/2012 for the course ECON 201 taught by Professor Çakmak during the Fall '10 term at Middle East Technical University.

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ps4answerkey - food stamps than with the cash – being...

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