ECON 201 Lecture Notes - Lecture 4: Emd Bl2, Revealed Preference, Indifference Curve
17 Apr 2016
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Application: coupons and cash subsidies welfare programs provide either in-kind transfers or a comparable amount of cash to low-income individuals. Without a program, consumer"s bl is bl1, chooses bundle d on ic1. Fd amount of food is inadequate and households should have at least fb amount of food. Consider the 2 policies: cash subsidy of amount just enough so that consumer chooses fb amount of food. Because food stamps can only be used on food, consumers are potentially worse off if they would find it optimal to consume less food and more other goods than allowed by the program. Revealed preference suppose that preferences are not known. Revealed preference analysis assumes that the consumer always chooses an optimal basket and that, although prices and income may vary, his underlying preferences do not change. All baskets to the northeast of a must be preferred to a.
