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a) John is on social welfare that gives him 20 units of x (in terms of food stamps) every week. Let us assume that he
a) John is on social welfare that gives him 20 units of x (in terms of food stamps) every week. Let us assume that he has an option of selling some of his food stamps at 50% off (i.e., at 0.5px where px = price of x). Further assume that px=10, py=5, and he has $100 to spend per week and that his utility function is characterized by U(x, y)= min[2x, y]. Draw his budget constraint function and identify his optimal consumption bundle with help of a diagram. (5 points) (b) Instead of food stamps, the government may consider to give him the equivalent value of cash. What would his consumption bundle be? Is he better off or worse off? Why? (5 points) (c) What will your result in (b) be if his utility is U(x, y)=x2/3y1/3 ? Why? (5 points)
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