4) Consider the optimal allocation for milk and bread. The utility function is given by U=Milk*Bread. The consumer has an income of $1000, the price of milk is $1, and the price of bread is $1 as well.

a)Suppose the consumer receives a subsidy by the government of $200 that can be spent on milk and bread. Illustrate the optimal allocation between bread and milk before and after receiving the subsidy. (Only illustration required, no calculation).

Solution

b)Consider the original setup and suppose now that the government gives the individual a voucher of $200 that can only be spent on milk, not on bread. Illustrate the optimal allocation between bread and milk before and after receiving the voucher. (Only illustration required, no calculation).