3. Many companies, especially in Silicon Valley, offer free meals to their employees. A classmate who has
Question:
3. Many companies, especially in Silicon Valley, offer free meals to their employees. A classmate who has just completed ARE 100A tells you they are wasting money this way because this is an in-kind transfer, and the equivalent variation (EV) of an in-kind transfer is always less than its cash value. Therefore, those companies should stop offering meals and raise their employees' income instead. What, if anything, might your classmate be overlooking in arriving at this conclusion? (Select one or more)
(a) Our model might not apply because each employee is small relative to the company, violating a perfect market assumption.
(b) Our model might not apply because a free lunch is not interchangeable with a purchased lunch for many people, violating a perfect market assumption.
(c) Our model might not apply because employees know more about their preferences than the company, violating a perfect market assumption.
(d) Food is a necessity good, so the income elasticity would be less than one.
(e) The EV is only less than the cash value when the in-kind transfer is inframarginal.
(f) The EV is only less than the cash value when the in-kind transfer is binding.
(g) Companies are not wasting money because the compensating variation of an in-kind transfer is greater than its cash value.
(h) This is more like a subsidy than an in-kind transfer, so it would have a positive EV.
(i) Your classmate is correct, but we should be using compensating variation instead of equivalent variation.
(j) Your classmate is correct. Companies frequently waste money because they don't understand basic economics.