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?
-
The family is indifferent across the three alternatives.
- The family ranks Program A higher than either B or C, but is indifferent
between B and C.
- The family ranks Program
A higher than Program B which is, in turn, ranked higher than Program C.
- The family ranks Program B higher than either Program A or C, but is indifferent
between A and C.
- The family ranks Program
B higher than Program A which is, in turn, ranked higher than Program C.