PADP 6950 Midterm: PADP 6950 - Economic Foundations of Policy Analysis - Midterm Study Guide.Practice Problems
21 Feb 2019
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PADP 6950 Economic Foundations of Policy Analysis
1
Lecture 6 : Midterm Study Guide
I. Consumer Choice
i. Example: Food Stamp Policy (FSP)
•facts
-FSP: eligible household receives food stamps worth $300 of food
expenditures
-Budget Line: 1000 = 10F + 20G —> G = 50 - 1/2F
-Utility Function: U = F*G, when MRS = -G/F
•Compare expenditures with & without FSP
-step (1): find optimal bundle & its utility w/o FSP
@ optimal, slope of budget line = MRS
- (1/2) = - (G/F) —> G = 1/2F
plug G into Budget Line & Solve
1000 = 10F + 20(1/2F) —> F = 50
1000 = 10(50) + 20G —> G = 25
optimal bundle (50,25)
Utility = F*G = 50*25 = 1250utils
-step (2): find new budget line, optimal
bundle, & its utility w/ FSP
new budget line: 1300 = 10F + 20G
@ optimal, slope of budget line = MRS
- (1/2) = - (G/F) —> G = 1/2F
plug G into Budget Line & Solve
1300 = 10F + 20(1/2F) —> F = 65
1300 = 10(65) + 20G —> G = 32.5
new optimal bundle (65, 32.5)
Utility = F*G = 65*32.5 = 2112.5utils
-step (3): analyze: the program
allows for 15 additional units of
food (increasing food expenditure by $150) — falls on higher
indifference curve so overall better off
Document Summary
Lecture 6 : midterm study guide: consumer choice, example: food stamp policy (fsp, facts. Fsp: eligible household receives food stamps worth of food expenditures. Budget line: 1000 = 10f + 20g > g = 50 - 1/2f. Utility function: u = f*g, when mrs = -g/f: compare expenditures with & without fsp. Step (1): nd optimal bundle & its utility w/o fsp. 1000 = 10f + 20(1/2f) > f = 50. 1000 = 10(50) + 20g > g = 25 optimal bundle (50,25) Step (2): nd new budget line, optimal bundle, & its utility w/ fsp new budget line: 1300 = 10f + 20g. @ optimal, slope of budget line = mrs. (1/2) = - (g/f) > g = 1/2f plug g into budget line & solve. 1300 = 10f + 20(1/2f) > f = 65. 1300 = 10(65) + 20g > g = 32. 5 new optimal bundle (65, 32. 5)
