Question from Past Microeconomics Qualifying Exam[]

Fall 2005 - Section I, Question three, George Mason University

T, F, U. State first whether the following statements are true, false or uncertain. Then briefly explain your reasoning in four or five sentences. You may use a graph if it helps clarify your answer.

Giving someone $100 of food each month will always increase their consumption of food by at least $100.


False. If the food donation replaces some of the food consumption pre donation its effect will be an increase in income. The incrased income will be spent on food as well as other goods according to the elasticities of demand for all goods.

This graph shows the increase in budget line between goods X and Y as a result of an In Kind Transfer

  • This Graph shows the Difference between an "In Kind Gift" and a cash payout. The Greeen Area would be availble with a cash handout. In the case where you simply give something to a person, there exists a kinked budget demand such that if they were consuming nothing then now they are consuming an amount of X equal to the distance between the vertical lines. In the question: The gift is food. It seems reasonable to assume that if X = Food then no one is consuming zero X. So change must be in the intermediate territory.

This graph shows the effect of indifference curves (or level sets of a utility function)

  • In this case the green indifference curves: The person is consuming more food than they would if the gift were an equal amount of money. They consume at the kink -- since the prefered set B is not available as it would be if the gift were in cash.
  • The red indifference curves: A gift of food or money is not binding on the distribution between food (X) and all other goods (Y). This person could be indifferent between the two types of gifts. The point 2 is available in the case of money or "in kind" gift.

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