Question

The Jones family always spends 20 percent of its income on food, and the remainder on other goods and services. Measure the quantities of food as well as other goods and services in dollars (with their respective prices normalized to equal 1). Suppose that the low level of income the family earns, $15,000 per year, makes it eligible for government assistance.

a. Suppose that the family receives an income grant of $5,000 per year. How much food will it consume annually? Explain

b. If the family had instead received food stamps (vouchers that can only be spent on food and that cannot be sold to others) worth $5,000 per year, what would its consumption of food have been? Would the family have felt as well off as with the income grant? Explain.

c. Given the above, offer a brief rationale for the use of vouchers like food stamps rather than cash grants.

Answer 1

Part a :

Total Income of Household : $15,000 + $5,000 = $20,000

Income %age spent on Food : 20%

Therefore, Quantity of Food purchased : 20% of $20,000 = $4,000

If the household spends 20% of its income on food products, then at ny income given they will spend 20% on foods, due to their preference. Since, the government grant adds to their income, making it $20,000, they will spend 20% of their total income on food. Therefore, they buy $4000 worth of food.

Therefore, income spent on other goods and services = $20,000 - $4,000 = $16,000

Part b :

When the family recieves $5,000 worth of food voucher, their income does not change and remains $15,000. At this level of income, they would want to consume food at 20% of their income's worth, which would be $3,000(20% of $15,000).

Therefore, their total food consumption would be of $3000.

Income spent on other goods and services = $15,000(As the food is consumed by using the food vouchers)

Now the family consumes $3,000 of food and $15,000 of other goods and services when they receive food vouchers whereas they would consume $4,000 of food and $16,000 of other goods and services when they recieved the income grant. As a result, they are worse off when they recieve food vouchers as their total consumption and benefit falls.

Part c :

According to the above given example situation, the family is better off with income grants because then they have flexibility to use the income grant as they see fit according to their immediate benefit. While in the case of food vouchers, the flexibility ends. They can only buy food upto the value of vouchers and if the amount spent on food is lesser than the value of food voucher, the excess worth of food stamp becomes a loss.