Consider food stamps where the government gives a person $100 worth of food stamps that can only be used to buy food. When the person buys food instead of paying cash he gives an equivalent value of food stamps, e.g. if he buys $50 of food he must surrender $50 of food stamps. After his food stamps are exhausted, the person can continue to buy food but must pay cash. The person's budget line when he receives food stamps shows all the combinations of the 2 goods he can buy using his monetary income plus his food stamps together and is kinked.
Consider food stamps where the government gives a person $100 worth of food stamps that can only be used to buy food. When the person buys food instead of paying cash he gives an equivalent value of food stamps, e.g. if he buys $50 of food he must surrender $50 of food stamps. After his food stamps are exhausted, the person can continue to buy food but must pay cash. The person's budget line when he receives food stamps shows all the combinations of the 2 goods he can buy using his monetary income plus his food stamps together and is kinked.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
Consider food stamps where the government gives a person $100 worth of food stamps that can only be used to buy food.
When the person buys food instead of paying cash he gives an equivalent value of food stamps, e.g. if he buys $50 of food he must surrender $50 of food stamps.
After his food stamps are exhausted, the person can continue to buy food but must pay cash.
The person's budget line when he receives food stamps shows all the combinations of the 2 goods he can buy using his monetary income plus his food stamps together and is kinked.
Transcribed Image Text:**Graph Explanation:**
The provided graph illustrates three budget lines in a model depicting the allocation of resources between "Food" and "All Other Goods." The vertical axis represents "All Other Goods," while the horizontal axis represents "Food."
**Details of the Graph:**
1. **Blue Line (Budget Line before Food Stamps):**
- This line indicates the budget constraint a person faces before receiving any food stamps. It shows the trade-off between spending on food and other goods with a given budget.
2. **Red Line (Budget Line after Food Stamps):**
- This line demonstrates how the budget constraint changes after the person receives food stamps. The intercept on the food axis increases, reflecting an increased ability to purchase food without reducing spending on other goods.
3. **Green Line (Budget Line after Food Stamps but No Cash Use):**
- The green line depicts the scenario where food stamps are used exclusively for food without any cash expenditure. It stretches parallel to the food axis, limited by the value of food stamps, and does not alter the purchase of all other goods.
**Points on the Graph:**
- **Point B:**
- Represents a situation where the person utilizes all food stamps to buy food, using no cash. The intersection point on the food axis after including food stamps is marked, indicating this complete allocation.
- **Point A:**
- At this point, like Point B, all food stamps are used, and no cash is spent on food, emphasizing complete reliance on food stamps for food purchases.
Overall, the graph visually represents how the introduction of food stamps alters budget constraints and influences the allocation decisions between food and other goods.
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