1. The Theory of Consumer Choice Chapter 21 Copyright © 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777.

2. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The theory of consumer choice addresses the following questions: u Do all demand curves slope downward? u How do wages affect labor supply? u How do interest rates affect household saving? u Do the poor prefer to receive cash or in-kind transfers?

3. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Budget Constraint u The budget constraint depicts the consumption “bundles” that a consumer can afford. u People consume less than they desire because their spending is constrained, or limited, by their income.

4. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Budget Constraint It shows the various combinations of goods the consumer can afford given his or her income and the prices of the two goods.

5. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Consumer’s Opportunities Copyright © 2001 by Harcourt, Inc. All rights reserved

6. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Consumer’s Budget Constraint u Any point on the budget constraint line indicates the consumer’s combination or tradeoff between two goods. u For example, if the consumer buys no pizzas, he can afford 500 pints of Pepsi (point B). If he buys no Pepsi, he can afford 100 pizzas (point A).

7. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Consumer’s Budget Constraint... Quantity of Pizza Quantity of Pepsi 0 Consumer’s budget constraint 500 B 100 A

8. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Consumer’s Budget Constraint u Alternately, the consumer can buy 50 pizzas and 250 pints of Pepsi.

9. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Consumer’s Budget Constraint... Quantity of Pizza Quantity of Pepsi 0 250 50 100 500 B C A Consumer’s budget constraint

10. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Consumer’s Budget Constraint u The slope of the budget constraint line equals the relative price of the two goods, that is, the price of one good compared to the price of the other. u It measures the rate at which the consumer will trade one good for the other.

11. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Preferences: What the Consumer Wants A consumer’s preference among consumption bundles may be illustrated with indifference curves.

12. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Representing Preferences with Indifference Curves An indifference curve shows bundles of goods that make the consumer equally happy.

13. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Consumer’s Preferences... Quantity of Pizza Quantity of Pepsi 0 C B A Indifference curve, I 1 D I2I2

14. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. u The consumer is indifferent, or equally happy, with the combinations shown at points A, B, and C because they are all on the same curve. The Consumer’s Preferences

15. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Marginal Rate of Substitution u The slope at any point on an indifference curve is the marginal rate of substitution. u It is the rate at which a consumer is willing to substitute one good for another. u It is the amount of one good that a consumer requires as compensation to give up one unit of the other good.

16. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Consumer’s Preferences... Quantity of Pizza Quantity of Pepsi 0 C B A D Indifference curve, I 1 I2I2 1 MRS

17. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Properties of Indifference Curves ¶ Higher indifference curves are preferred to lower ones. · Indifference curves are downward sloping. ¸ Indifference curves do not cross. ¹ Indifference curves are bowed inward.

18. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Property 1: Higher indifference curves are preferred to lower ones. u Consumers usually prefer more of something to less of it. u Higher indifference curves represent larger quantities of goods than do lower indifference curves.

19. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Property 1: Higher indifference curves are preferred to lower ones. Quantity of Pizza Quantity of Pepsi 0 C B A D Indifference curve, I 1 I2I2

20. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Property 2: Indifference curves are downward sloping. u A consumer is willing to give up one good only if he or she gets more of the other good in order to remain equally happy. u If the quantity of one good is reduced, the quantity of the other good must increase. u For this reason, most indifference curves slope downward.

21. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Property 2: Indifference curves are downward sloping. Quantity of Pizza Quantity of Pepsi 0 Indifference curve, I 1

22. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Property 3: Indifference curves do not cross. u Points A and B should make the consumer equally happy. u Points B and C should make the consumer equally happy. u This implies that A and C would make the consumer equally happy. u But C has more of both goods compared to A.

23. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Property 3: Indifference curves do not cross. Quantity of Pizza Quantity of Pepsi 0 C A B

24. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Property 4: Indifference curves are bowed inward. u People are more willing to trade away goods that they have in abundance and less willing to trade away goods of which they have little. u These differences in a consumer’s marginal substitution rates cause his or her indifference curve to bow inward.

25. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 1 MRS = 1 8 3 Indifference curve A Property 4: Indifference curves are bowed inward. Quantity of Pizza Quantity of Pepsi 0 14 2 3 7 B 1 MRS = 6 4 6

26. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Two Extreme Examples of Indifference Curves u Perfect substitutes u Perfect complements

27. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Perfect Substitutes u Two goods with straight-line indifference curves are perfect substitutes. u The marginal rate of substitution is a fixed number.

28. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Perfect Substitutes Dimes 0 Nickels 2 1 4 2 I1I1 I2I2 6 3 I3I3

29. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Perfect Complements Two goods with right-angle indifference curves are perfect complements.

30. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Perfect Complements Right Shoes0 Left Shoes 75 7 5 I1I1 I2I2

31. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Optimization: What the Consumer Chooses u Consumers want to get the combination of goods on the highest possible indifference curve. u However, the consumer must also end up on or below his budget constraint.

32. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Optimization: What the Consumer Chooses u Combining the indifference curve and the budget constraint determines the consumer’s optimal choice. u Consumer optimum occurs at the point where the highest indifference curve and the budget constraint are tangent.

33. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Consumer’s Optimal Choice The consumer chooses consumption of the two goods so that the marginal rate of substitution equals the relative price.

34. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Consumer’s Optimal Choice At the consumer’s optimum, the consumer’s valuation of the two goods equals the market’s valuation.

35. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Consumer’s Optimum... Quantity of Pizza Quantity of Pepsi 0 I1I1 I2I2 I3I3 Budget constraint A B Optimum

36. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How Changes in Income Affect the Consumer’s Choices u An increase in income shifts the budget constraint outward. u The consumer is able to choose a better combination of goods on a higher indifference curve.

37. An Increase in Income... Quantity of Pizza Quantity of Pepsi 0 I1I1 I2I2 2. …raising pizza consumption… 3. …and Pepsi consumption. Initial optimum New budget constraint 1. An increase in income shifts the budget constraint outward… Initial budget constraint New optimum Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

38. Normal versus Inferior Goods u If a consumer buys more of a good when his or her income rises, the good is called a normal good. u If a consumer buys less of a good when his or her income rises, the good is called an inferior good.

39. New budget constraint 1. When an increase in income shifts the budget constraint outward... An Inferior Good... Quantity of Pizza Quantity of Pepsi 0 Initial optimum I1I1 New optimum I2I2 2.... pizza consumption rises, making pizza a normal good... 3.... but Pepsi consumption falls, making Pepsi an inferior good. Initial budget constraint Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

40. How Changes in Prices Affect Consumer Choices A fall in the price of any good rotates the budget constraint outward and changes the slope of the budget constraint.

41. A Change in Price... Quantity of Pizza 100 Quantity of Pepsi 1,000 500 0 I1I1 New budget constraint 3. …and raising Pepsi consumption. Initial budget constraint 2. …reducing pizza consumption… 1. A fall in the price of Pepsi rotates the budget constraint outward… New optimum I2I2 Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

42. Income and Substitution Effects u A price change has two effects on consumption. u An income effect u A substitution effect

43. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Income Effect The income effect is the change in consumption that results when a price change moves the consumer to a higher or lower indifference curve.

44. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Substitution Effect The substitution effect is the change in consumption that results when a price change moves the consumer along an indifference curve to a point with a different marginal rate of substitution.

45. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. A Change in Price: Substitution Effect A price change first causes the consumer to move from one point on a indifference curve to another on the same curve. u Illustrated by movement from point A to point B.

46. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. A Change in Price: Income Effect After moving from one point to another on the same curve, the consumer will move to another indifference curve. u Illustrated by movement from point B to point C.

47. Income and Substitution Effects... Quantity of Pizza Quantity of Pepsi 0 A Initial optimum I1I1 New budget constraint Initial budget constraint I2I2 CNew optimum Income effect Substitution effect B Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

48. Income and Substitution Effects When the Price of Pepsi Falls

49. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Deriving the Demand Curve A consumer’s demand curve can be viewed as a summary of the optimal decisions that arise from his or her budget constraint and indifference curves.

50. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Deriving the Demand Curve... (a) The Consumer’s Optimum(b) The Demand Curve for Pepsi I1I1 I2I2 A B Initial budget constraint New budget constraint 50 150 Quantity of Pizza Quantity of Pepsi 0 0 50150 1 $2 Price of Pepsi A B

51. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Do all demand curves slope downward? u Demand curves can sometimes slope upward. u This happens when a consumer buys more of a good when its price rises.

52. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Giffen Goods u Economists use the term Giffen good to describe a good that violates the law of demand. u Giffen goods are inferior goods for which the income effect dominates the substitution effect. u They have demand curves that slope upwards.

53. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Quantity of Meat A Quantity of Potatoes 0 E C I2I2 I1I1 Initial budget constraint New budget constraint D B Optimum with low price of potatoes Optimum with high price of potatoes 1. An increase in the price of potatoes rotates the budget... 2...which increases potato consumption if potatoes are a Giffen good. A Giffen Good...

54. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How do wages affect labor supply? u If the substitution effect is greater than the income effect for the worker, he or she works more. u If income effect is greater than the substitution effect, he or she works less.

55. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Hours of Leisure 0 2,000 $5,000 60 Consumption 100 Optimum I3I3 I2I2 I1I1 The Work-Leisure Decision...

56. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Hours of Labor Supplied 0 Wage... the labor supply curve slopes upward. Hours of Leisure 0 Consumption (a) For a person with these preferences… I2I2 I1I1 BC 2 BC 1 2. …hours of leisure decrease… 3....and hours of labor increase. 1. When the wage rises… An Increase in the Wage...

57. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Hours of Labor Supplied 0 Wage... the labor supply curve slopes backward. Hours of Leisure 0 Consumption (b) For a person with these preferences… I2I2 I1I1 BC 2 BC 1 1. When the wage rises… An Increase in the Wage... 2. …hours of leisure increase… 3....and hours of labor decrease.

58. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. How do interest rates affect household saving? u If the substitution effect of a higher interest rate is greater than the income effect, households save more. u If the income effect of a higher interest rate is greater than the substitution effect, households save less.

59. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Consumption when Young 0 55,000 $110,000 $50,000 Consumption when Old 100,000 Optimum I3I3 I2I2 I1I1 Budget constraint The Consumption-Saving Decision...

60. An Increase in the Interest Rate... 0 Consumption when Old 1. A higher interest rate rotates the budget constraint outward... I2I2 I1I1 BC 2 BC 1 2. …resulting in lower consumption when young and, thus, higher saving. Consumption when Young Hours of Leisure 0 I2I2 I1I1 BC 2 BC 1 Consumption when Old 1. A higher interest rate rotates the budget constraint outward... 2. …resulting in higher consumption when young and, thus, lower saving. (a) Higher Interest Rate Raises Saving (b) Higher Interest Rate Lowers Saving Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

61. How do interest rates affect household saving? Thus, an increase in the interest rate could either encourage or discourage saving.

62. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Do the poor prefer to receive cash or in-kind transfers? If an in-kind transfer of a good forces the recipient to consume more of the good than he would on his own, then the recipient prefers the cash transfer.

63. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Do the poor prefer to receive cash or in-kind transfers? If the recipient does not consume more of the good than he would on his own, then the cash and in-kind transfer have exactly the same effect on his consumption and welfare.

64. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Cash Transfer In-Kind Transfer (a) The Constraint Is Not Binding Nonfood Consumption 0 $1,000 Food A B I2I2 I1I1 BC 1 BC 2 (with $1,000 cash) Nonfood Consumption 0 Food A B I2I2 I1I1 BC 1 BC 2 (with $1,000 food stamps) Cash versus In-Kind Transfers...

65. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Cash Transfer In-Kind Transfer (b) The Constraint Is Binding Nonfood Consumption 0 $1,000 Food A B I2I2 I1I1 BC 1 BC 2 (with $1,000 cash) Nonfood Consumption 0 Food A B I2I2 I1I1 BC 1 BC 2 (with $1,000 food stamps) Cash versus In-Kind Transfers... C I3I3

66. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Summary u A consumer’s budget constraint shows the possible combinations of different goods he can buy given his income and the prices of the goods. u The slope of the budget constraint equals the relative price of the goods. u The consumer’s indifference curves represent his preferences.

67. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Summary u Points on higher indifference curves are preferred to points on lower indifference curves. u The slope of an indifference curve at any point is the consumer’s marginal rate of substitution. u The consumer optimizes by choosing the point on his budget constraint that lies on the highest indifference curve.

68. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Summary u When the price of a good falls, the impact on the consumer’s choices can be broken down into an income effect and a substitution effect. u The income effect is the change in consumption that arises because a lower price makes the consumer better off. u The income effect is reflected by the movement from a lower to a higher indifference curve.

69. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Summary u The substitution effect is the change in consumption that arises because a price change encourages greater consumption of the good that has become relatively cheaper. u The substitution effect is reflected by a movement along an indifference curve to a point with a different slope.

70. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Summary u The theory of consumer choice can explain: u Why demand curves can potentially slope upward. u How wages affect labor supply. u How interest rates affect household saving. u Whether the poor prefer to receive cash or in- kind transfers.

71. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Graphical Review

72. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Consumer’s Budget Constraint... Quantity of Pizza Quantity of Pepsi 0 Consumer’s budget constraint 500 B 100 A

73. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Consumer’s Budget Constraint... Quantity of Pizza Quantity of Pepsi 0 250 50 100 500 B C A Consumer’s budget constraint

74. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Consumer’s Preferences... Quantity of Pizza Quantity of Pepsi 0 C B A Indifference curve, I 1 D I2I2

75. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Consumer’s Preferences... Quantity of Pizza Quantity of Pepsi 0 C B A D Indifference curve, I 1 I2I2 1 MRS

76. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Property 1: Higher indifference curves are preferred to lower ones. Quantity of Pizza Quantity of Pepsi 0 C B A D Indifference curve, I 1 I2I2

77. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Property 2: Indifference curves are downward sloping. Quantity of Pizza Quantity of Pepsi 0 Indifference curve, I 1

78. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Property 3: Indifference curves do not cross. Quantity of Pizza Quantity of Pepsi 0 C A B

79. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Property 4: Indifference curves are bowed inward. 1 MRS = 1 8 3 Indifference curve A Quantity of Pizza Quantity of Pepsi 0 14 2 3 7 B 1 MRS = 6 4 6

80. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Perfect Substitutes Dimes 0 Nickels 2 1 4 2 I1I1 I2I2 6 3 I3I3

81. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Perfect Complements Right Shoes0 Left Shoes 75 7 5 I1I1 I2I2

82. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Consumer’s Optimum... Quantity of Pizza Quantity of Pepsi 0 I1I1 I2I2 I3I3 Budget constraint A B Optimum

83. An Increase in Income... Quantity of Pizza Quantity of Pepsi 0 I1I1 I2I2 2. …raising pizza consumption… 3. …and Pepsi consumption. Initial optimum New budget constraint 1. An increase in income shifts the budget constraint outward… Initial budget constraint New optimum Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

84. An Inferior Good... New budget constraint 1. When an increase in income shifts the budget constraint outward... Quantity of Pizza Quantity of Pepsi 0 Initial optimum I1I1 New optimum I2I2 2.... pizza consumption rises, making pizza a normal good... 3.... but Pepsi consumption falls, making Pepsi an inferior good. Initial budget constraint Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

85. A Change in Price... Quantity of Pizza 100 Quantity of Pepsi 1,000 500 0 I1I1 New budget constraint 3. …and raising Pepsi consumption. Initial budget constraint 2. …reducing pizza consumption… 1. A fall in the price of Pepsi rotates the budget constraint outward… New optimum I2I2 Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

86. Income and Substitution Effects... Quantity of Pizza Quantity of Pepsi 0 A Initial optimum I1I1 New budget constraint Initial budget constraint I2I2 CNew optimum Income effect Substitution effect B Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

87. Deriving the Demand Curve... (a) The Consumer’s Optimum(b) The Demand Curve for Pepsi I1I1 I2I2 A B Initial budget constraint New budget constraint 50 150 Quantity of Pizza Quantity of Pepsi 0 0 50150 1 $2 Price of Pepsi A B

88. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Quantity of Meat A Quantity of Potatoes 0 E C I2I2 I1I1 Initial budget constraint New budget constraint D B Optimum with low price of potatoes Optimum with high price of potatoes 1. An increase in the price of potatoes rotates the budget... 2...which increases potato consumption if potatoes are a Giffen good. A Giffen Good...

89. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Hours of Leisure 0 2,000 $5,000 60 Consumption 100 Optimum I3I3 I2I2 I1I1 The Work-Leisure Decision...

90. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Hours of Labor Supplied 0 Wage... the labor supply curve slopes upward. Hours of Leisure 0 Consumption (a) For a person with these preferences… I2I2 I1I1 BC 2 BC 1 2. …hours of leisure decrease… 3....and hours of labor increase. 1. When the wage rises… An Increase in the Wage...

91. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. An Increase in the Wage... Hours of Labor Supplied 0 Wage... the labor supply curve slopes backward. Hours of Leisure 0 Consumption (b) For a person with these preferences… I2I2 I1I1 BC 2 BC 1 1. When the wage rises… 2. …hours of leisure increase… 3....and hours of labor decrease.

92. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Consumption when Young 0 55,000 $110,000 $50,000 Consumption when Old 100,000 Optimum I3I3 I2I2 I1I1 Budget constraint The Consumption-Saving Decision...

93. An Increase in the Interest Rate... 0 Consumption when Old 1. A higher interest rate rotates the budget constraint outward... I2I2 I1I1 BC 2 BC 1 2. …resulting in lower consumption when young and, thus, higher saving. Consumption when Young Hours of Leisure 0 I2I2 I1I1 BC 2 BC 1 Consumption when Old 1. A higher interest rate rotates the budget constraint outward... 2. …resulting in higher consumption when young and, thus, lower saving. (a) Higher Interest Rate Raises Saving (b) Higher Interest Rate Lowers Saving Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

94. Cash Transfer In-Kind Transfer (a) The Constraint Is Not Binding Nonfood Consumption 0 $1,000 Food A B I2I2 I1I1 BC 1 BC 2 (with $1,000 cash) Nonfood Consumption 0 Food A B I2I2 I1I1 BC 1 BC 2 (with $1,000 food stamps) Cash versus In-Kind Transfers...

95. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Cash versus In-Kind Transfers... Cash Transfer In-Kind Transfer (b) The Constraint Is Binding Nonfood Consumption 0 $1,000 Food A B I2I2 I1I1 BC 1 BC 2 (with $1,000 cash) Nonfood Consumption 0 Food A B I2I2 I1I1 BC 1 BC 2 (with $1,000 food stamps) C I3I3