Question: a the smith family has an income of 1000 per...
a. The Smith family has an income of $1,000 per month, and currently spends $400 monthly on food. Assume that the initial price of a unit of food is $1, and the initial price of a unit of “all other goods” is also $1. Draw this budget line, and also an indifference curve – which we assume has the standard shape – that the family can just reach, given its budget.
b. The government considers that the Smith family is rather poor, and is discussing a number of possible ways to help. For each of the following, draw the new budget line:
b.1. The government provides income support in the form of a grant of $250.
b.2The government provides food stamps worth $250. These may only be spent on food.
b 3.The government provides a discount card that will allow the family to buy anything at half price, but only for the first $500 worth of purchases.
c. Which of the options in 8.b would the Smith family prefer? Why?