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Question: 1 consider a consumer who consumes two goods education e...

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1. Consider a consumer who consumes two goods: education (e) and money (m) spent on all other goods. The price of education is 50 while the price of money is 1 Her income is 10,000 a. Write her budget constraint and draw the budget line in a diagram with education as the horizontal axis and money as the vertical axis Suppose the government would like to increase the welfare of this consumer by subsidizing education. b. Consider first the proposal that increases her income from 10,000 to 15,000 (for example, by introducing a program like the earned income tax credit). Lets call this policy as the cash transfer program. Write her new budget constraint and draw the new budget line in a diagram similar to a. c. Consider an alternative program that simply gives the consumer 100 units of education (for example, the Pell grant program that provides grants that can be spent only on education). Lets call this as the in-kind transfer program. You might have noticed that the two programs have the same cost. Write the consumers new budget constraint in this case and draw the budget line in a diagram d. Draw the budget lines for the above two programs in the same education-money diagram. Your answers to the questions below will rely on this diagram. d1. Illustrate a case in which the consumers rational choices from the two programs are the same (so that the consumer is equally well-off under the cash transfer and in-kind transfer program) d2. Illustrate a case in which the consumers rational choice from the cash transfer program lies on a higher indifference curve than her rational choice from the in-kind transfer program (so that she prefers the cash transfer to the in-kind transfer program) d3. Argue that her rational choice from the in-kind transfer program cannot lie on a higher indifference curve than her rational choice from the cash-transfer program Keep your answers to the above questions in mind as we will come back to this question again in Problem Set 2-we will try to reason why the government policies often involve in-kind transfers rather than cash transfers e. Comparing the two budget sets (one for the cash transfer program and one for the in-kind transfer program), is it the case that one budget set is smaller than the other budget set? Which one is smaller and which one is bigger? Explain intuitively your answers to d3 above from this perspective.
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