Question

In: Economics

how should draw graphs about the in-kind payments vs cash payments with budget constraint and the...

how should draw graphs about the in-kind payments vs cash payments with budget constraint and the indifference curves?

Solutions

Expert Solution

For better understanding the in kind payments and cash payments we would take the example of food and non food items .In many countries food stamps or cards for food items is allotted .This is known as the in kind payment sometimes a direct subsidy transfer in form of cash is done for which the consumer is allowed to use the way he likes this type of movement is known as cash payment

The graph given below shows the cash payments with budget constraint an indifference curve

As seen in this graph cash payments lead to a higher budget which moves the budget line outside parallelly this also means that we would shift to a higher indifference curve the consumer shifts from IC1 to IC2 to that is from point A to point B. In this case the consumer has the freedom to use the cash payments according to his needs so his whole budget has increased.

The graph below shows the in kind transfer and the budget constraint and Indifference curves related to it

In this graph Unlike the previous one there has been in kind transfer that is a particular amount of payment has been made for a specific use, in this case food so the consumer has to use the minimum allotted amount for food and it could not be spent on any other good. This explains the dotted line on the higher budget line that is even when the consumer wants to be on point Y he cannot be on Y due to the restriction of using that particular in kind payment on food so the consumer would be on. X instead of y

Such in kind payments restrict the consumers to use the budget other than for the given needs.

(You can comment for doubts)


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