Question

With the theory of consumer behavior, graphically illustrate and carefully explain why a cash gift generally is preferred to an in-kind gift of equal value. Can an in-kind gift be as good as a cash gift of equal value? Explain and graphically illustrate.

Answer 1

Theory of consumer behaviour basic assumption is that consumer is a rational being. Given the income and prices prevailing in the market, the consumer plans his spending of income in order to attain the highest utility that a consumer gains. It forms the axiom of utility maximisation.

Assumptions

1. Rationality- The consumer is rational in his approaches by trying to maximise his utility.

2. Cardinal utility- It means that the utility can be measured.

3. Constant marginal utility of money- It means that MU of money remains constant as income increases.

4. Diminishing marginal utility- It means that the marginal utility of commodity diminishes as more quantities are acquired by the consumers.

A cash gift is preferred over a in kind gift of the same value because non cash gifts generally yield or give less utility to the receiver of the same. This is mainly because in some situations the utility of the receiver may not match with the non cash gifts or it won't be able to make a mark in the preferences of the receiver. Gifts in non cash form are less liquid than the cash gifts which can be utilised or apportioned based on the priorities of the consumer concerned.

An in kind gift can be as good as a cash gift in certain cases. Like in some cases, when the intention of helping some needy who will not be able to make use of the cash gifts in their preferential way. This way these in kind gifts will be able to satisfy their preferential sets. For example, a person suffering from a disease receives a medical instrument which he couldn't have bought had he be given a cash as gift.

In most of the cases, non cash goods can turn into a liability. In kind gift can be allocated inaccurately in some cases, which would lead to inappropriate usage of the same thing. For example, woollen clothes are gifted in warm and humid areas.