Suppose the government has two policy options for poor households, namely to provide subsidies in the form of money worth $200 or in the form of goods (basic necessities) that are also worth $200. a. Describe the impact of the two policies above in terms of budget constraints (horizontal axis, X1, for basic necessities and vertical axis, X2, for goods other than basic necessities).
b. Redraw the figure in a) and add an indifference curve that shows consumer’s equilibrium before and after the subsidy policy. Explain the impact of subsidies on the new consumer’s equilibrium c. Redraw figure a) and add an indifference curve that shows the consumer’s equilibrium before and after the subsidy policy and shows the situation when poor households prefer cash subsidies then subsidies in the form of goods (basic necessities).
d. From the answers a) to c) above, are there any poor households that prefer subsidies in the form of goods then subsidies in the form of money? What is the reason for the government to provide subsidies in the form of goods?
