Consumption Theories

 

Example One:

 

Consider a utility maximizing family which earns $600 per month and which would always spend one-third of its income up to $1,000 per month on food. The government is contemplating three food supplement programs; they would apply to the family in question according to the following formula:

 

Program A: A monetary grant of $150 per month.

 

Program B: A monthly grant of $150 worth of food stamps redeemable only for food.

Program C: A provision allowing the monetary purchase of up to $100 in food stamps that can be purchased at the price of 40 cents for each $1 worth of food stamps. The food stamps are redeemable only for food.

 

Which of the following alternatives correctly records the utility rankings of this family across the three alternatives?

 

  1. The family is indifferent across the three alternatives.
  2. The family ranks Program A higher than either B or C, but is indifferent between B and C.
  3.  The family ranks Program A higher than Program B which is, in turn, ranked higher than Program C.
  4. The family ranks Program B higher than either Program A or C, but is indifferent between A and C.
  5.  The family ranks Program B higher than Program A which is, in turn, ranked higher than Program C.