Explain how you got the answers to help me understand please. For Questions 11 t
ID: 1197322 • Letter: E
Question
Explain how you got the answers to help me understand please.
For Questions 11 to 20, consider a household that consume only two goods – food and “other goods” – that are each normal goods The income of the household is $100, the price of food is $5 and the price of “other goods” is $10. The household always consumes 25 percent of its income (or income plus value of coupon) on food and 75 percent on other things.
The government is considering four policies designed to raise food consumption.
-- A transfer of $20 in cash to the household
-- A coupon that can be used only to consume 4 units of food
-- A subsidy of $2/unit on food
11. How much food and “other goods” does the household consume in the initial situation?
a) 25 food, 75 other goods
b) 5 food, 10 other goods
c) 20 food, 10 other goods
d) 5 food, 7.5 other goods
12. If the government gives a transfer of $20 in cash to the household, how much food and “other goods” does the household consume?
a) 5 food, 7.5 other goods
b) 9 food, 7.5 other goods
c) 6 food 9 other goods
d) 30 food, 90 other goods
13. If the government gives a coupon for 4 units of food to the household, how much food and “other goods” does the household consume?
a) 5 food, 7.5 other goods
b) 9 food, 7.5 other goods
c) 6 food 9 other goods
d) 30 food, 90 other goods
14. Between the $20 transfer and the coupon for 4 units of food, under which policy does the household consume more food?
a) Transfer
b) Coupon
c) Neither, consumption of food is the same
d) Cannot be determined
15. If the government gives a subsidy of $2/unit on food, how much does the household have to pay of its own money for one unit of food?
a) $2
b) $3
c) $5
d) $25
16. If the government gives a subsidy of $2/unit on food how many units of food does the household purchase?
a) 5 units
b) 6 units
c) 8.33 units
d) 9 units
17. How much does it cost the government with the $2/unit subsidy?
a) $2
b) $10
c) $16.67
d) $20
18. Under which policy is the household consumption of food the highest?
a) Initial situation
b) Transfer of $20
c) Coupon for 4 units of food
d) Subsidy of $2/unit
19. Under which policy does the government spend the least?
a) Initial situation
b) Transfer of $20
c) Coupon for 4 units of food
d) Subsidy of $2/unit
20. If the government wants to spend as little money as possible and raise the food consumption of the household as much as possible, which policy should it adopt?
a) Transfer of $20 in cash
b) Coupon worth 4 units of food
c) Subsidy of $2/unit
d) Doesn’t matter, they are all the same
Explanation / Answer
Q11. Initial income of household = $100
Price of Food = $5 per unit
Price of 'Other goods' = $10 per unit
Household spent 25% of its income on Food.
Total income spent on Food = 0.25 * $100 = $25
So, household spent $25 on Food.
Units of food purchased = Total amount spent on food/Price of food = $25/$5 = 5 units
So, 5 units of food are consumed.
Household spent 75% of its income on 'Other goods'.
Total income spent on Other goods = 0.75 * $100 = $75
So, household spent $75 on Other goods.
Units of Other goods purchased = Total amount spent on Other goods/Price of Other goods = $75/$10 = 7.5 units
So, 7.5 units of other goods are consumed.
Thus, in the initial situation, household consume 5 food and 7.5 other goods.
Hence, the correct answer is option (d).
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