Given the significant increases in the cost of living in Canada (and elsewhere), Governments (both Federal and Provincial) have been under pressure to provide financial support to at last individuals or households. This financial support can be in the form of direct payments (income) to individuals or subsidizing the purchase of certain goods (i.e. the government pays a portion of the purchase price). To keep things simple, let’s only consider our standard example in which the individual consumes food and clothing; and food is the good whose purchase is to be subsidized. a) Evaluate the impact of both of these options on the utility of the individuals receiving support. (40%) b) Suppose the government only subsidizes the purchase of the first 5 units of food, how does this change your answer to a)? (40%) c) If the government ends up spending the same amount of total subsidies in either case (income support or price subsidy), which option will have a more substantial effect on the individual’s level of utility? (20%)
Given the significant increases in the cost of living in Canada (and elsewhere), Governments (both Federal and Provincial) have been under pressure to provide financial support to at last individuals or households.
This financial support can be in the form of direct payments (income) to individuals or subsidizing the purchase of certain goods (i.e. the government pays a portion of the purchase
a) Evaluate the impact of both of these options on the utility of the individuals receiving support. (40%)
b) Suppose the government only subsidizes the purchase of the first 5 units of food, how does this change your answer to a)? (40%)
c) If the government ends up spending the same amount of total subsidies in either case (income support or price subsidy), which option will have a more substantial effect on the individual’s level of utility? (20%)
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