econ 3
Pearl_JackDUE N 2 HOURS
PLEASE DON'T SEND HANDSHAKE IF YOU CAN'T DO IN 2 HOURS
1. Suppose the income elasticity of demand for food is .50 and the price elasticity of demand (in absolute value) is .75. Suppose also that Matt spends $10,000 a year on food, that the price of food is $4 and that his income is $25,000.
a. The government decides to implement a per unit subsidy for food = $2. What is Matt’s new utility max position? Illustrate graphically and include relevant numbers.
b. How much money would Matt need to receive in the form of a lump sum subsidy to achieve the SAME level of utility as received with the per-unit subsidy?
c. Illustrate this point graphically including the new utility max quantity.
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