Economist Joel Waldfogel may be America's biggest Grinch. He bemoans what he calls the "deadweight loss of Christmas" created when people give gifts (such as ugly sweaters) the recipients would rarely, if ever, buy for themselves.

a. Draw a graph with a budget constraint showing affordable bundles of a composite good costing $1 and ugly sweaters. (You may assume some level of income and a price for ugly sweaters.)

b. Cheryl might get some utility from an ugly sweater, but is currently spending all of her income on the composite good. Add an indifference curve that reflects Cheryl's situation. What must her indifference curves look like?

c. Suppose Cheryl receives a gift of one ugly sweater from a co-worker. Show the effect of the gift on Cheryl's budget constraint. Where on the constraint is Cheryl likely to maximize her utility?

d. Waldfogel suggests that the world might be a happier place if instead of giving ugly sweaters, people simply gave an equivalent amount of cash. Draw the budget constraint Cheryl would face if this were the case. Add an indifference curve or two to show what happens when Cheryl maximizes her utility. Does the cash gift make her happier than the sweater?