Intermediate Micro economics

Intermediate Micro economics

1.
The Food Stamp Program
Since the Food Stamp Act of 1964 the U.S. federal government has provided a subsidy on food for people. Let’s analyze the effects of the 1979 reforms on the budget sets of eligible households. Before 1979, eligible households were allowed to purchase food stamps, which could then be used to purchase food at retail outlets.

a) Take as a first setting the example of January of 1975. A family of four with a monthly income of $100 would pay $25 to receive $153 worth of food (this is the same as receiving $6.12 on food for every $1 paid).Depict the budget constraint of a family of four with the food stamp program and another one for a family not eligible for the program. In your picture, label “food” as the good in the x-axis, with px = 1 and “other goods” as the good in the y-axis with py = 2 (assume $25 is the maximum amount of their income they can spend on stamps)

b) In 1979 the Food Stamp program was modified. Now instead of requiring that households purchase food stamps, they are now simply given to qualified households. Suppose that a household now receives a grant of $200 of food stamps a month. Then this means that the household can consume $200 more of food per month, regardless of how much it is spending on other goods. Depict the budget constraint of thesame family of four as in a) with the food stamp program and another one for a family noteligible for the program under the new policy. Now the eligible family receives a grant of $25 offood stamps a month in your picture, label “food” as the good in the x-axis and “other goods”as the good in the y-axis.

c) Can you assess how the reform affected both types of families? Which of the scenarios each family would prefer if they could choose? Explain your recommendations based on the budget sets you depicted in the previous two questions and assuming families have preferences that satisfy axioms 1-4.

2.
Consider the utility function U(x, y) = 2x^1/2+4y^1/2
a) Find the demand functions for goods x and y as they depend on prices and income (neatly show work and circle answer).
b) Find compensated demand functions for goods x and y (neatly show work and circleanswer).
c)
d) Write down the Slutsky equation and explain Income and Substitution effects.
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