A number of proposals have been made to institute a fuel-stamp program of some kind to reduce the impact of high heating oil prices on low-income homeowners who are dependent on oil for heat. You have been asked by the governor to analyze two such proposals. Plan 1 would pay 50% of the cost of all heating oil purchased by eligible families and would place no limit on the amount of subsidized oil families could buy. Plan 2 would give each family 200 free gallons per month during the heating season. The governor wants you to do the analysis for a typical low-income family, which has an income of $2,000 per month. Assume that the poor have preferences defined over heating oil, O , and all other goods, x . The price of oil is $5 per gallon and the price of all other goods is $1.

6d) Under which plan does the family consume more heating oil? Create a diagram illustrating your answer.

6e) Under which plan is the family better off? Explain your answer in terms of the diagram you created in part 6d).