Answer to Question #63693 in Microeconomics for Aisha

Question

Bill has an income of $200. He may buy up to $100 worth of food stamps, where a food stamp can be used to purchase $1 worth of food costs him 25¢. [Assume there is no black market for food stamps.]
A. Under what conditions would he prefer receiving $75 cash instead of being able to buy up to $100 worth of food stamps? Explain using a graph. (15)
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B. If Bill got $100 worth of food stamps for free (instead of having to buy them at a discount), would he be more or less likely to prefer in cash ($100) to food stamps than in (A)? (10)

Answer 1

I = $200. He may buy up to $100 worth of food stamps, where a food stamp can be used to purchase $1 worth of food costs him 25¢.
A. He would prefer receiving $75 cash instead of being able to buy up to $100 worth of food stamps, if the marginal utility of another good is higher than the marginal utility of food for Bill.
B. If Bill got $100 worth of food stamps for free, then he would be less likely to prefer in cash ($100) to food stamps than in (A), because he will receive food for free as a result.