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Drawing budget lines

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The U.S government spends over $15.8 billion in its Food Stamp Program to provide millions of Americans with the means to purchase food. These stamps are redeemable for food at over 160,000 store locations throughout the nation, and they can not be sold for cash or used to purchase nonfood items.

a. Draw the family's budget line on a graph where the quantity of food consumed per month is measured along the horizontal axis and the quantity of non-food items consumed per month is measured along the vertical axis, if the family has a cash income of $500 per month and is not eligible for food stamps. Also it is known that Pf (price of good) is $5 and Pn (nonfood items) is $10. Explain

b. Draw the family's budget line under these conditions if it takes part in the food stamp program described above assuming that the value of food stamps is $200.

c. Draw the family's budget line if it were given $200 per month in cash, rather than in food via the above food stamps program. Explain (compare it to the food stamps budget line)

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Solution Preview

Please refer attached file for missing graphs.

a. Draw the family's budget line on a graph where the quantity of food consumed per month is measured along the horizontal axis and the quantity of non-food items consumed per month is measured along the vertical axis, if the family has a cash income of $500 per month and is not eligible for food stamps.  Also it is known that Pf (price of good) is $5 and Pn (nonfood items) is $10.  Explain

Maximum amount of units of food item that can be bought with $500=x-intercept=500/Pf=500/5= 100
Maximum amount of units of non food item that can be bought with $500=y-intercept=500/Pn=500/10=50
We got two points on budget line namely (100,0) and ...

Solution Summary

Solution draws the budget lines in case given family takes part in Food Stamp Program and in case family is given cash in place of food stamps.

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Budget line: Supposedly, indifference theory can explain all rational choices and behavior. Try the theory out on this situation. Suppose the only consideration for couples to have a baby or not was money. If a baby costs $5,000 a year, the price of "All other goods" is $1, and the couple has an annual income of $40,000:

a.Construct the budget line for having a family.

b.suppose the Smiths plan to have 3 children while the Jones decide against having any children at all. Draw the indifference maps and budget lines consistent with these decisions. (Hint: this question is easier if you have one graph for the Smiths and one for the Jones.

c.For the Smiths, derive the trade off (marginal rate of substitution) between children and all other goods they could consume?

Supposedly, indifference theory can explain all rational choices and behavior. Try the theory out on this situation. Suppose the only consideration for couples to have a baby or not was money. If a baby costs $5,000 a year, the price of "All other goods" is $1, and the couple has an annual income of $40,000:

a.Construct the budget line for having a family.

b.suppose the Smiths plan to have 3 children while the Jones decide against having any children at all. Draw the indifference maps and budget lines consistent with these decisions. (Hint: this question is easier if you have one graph for the Smiths and one for the Jones.

c.For the Smiths, derive the trade off (marginal rate of substitution) between children and all other goods they could consume?

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