Answer Happy

3. Jane buys Food and Clothing with U=F*C. Her income is 12. Price of food is 2, price of clothing is 1. Marginal utilities of food and clothing are MU-=C and MUC=F. (a) How many units of food she consumes if she maximizes her utility? Illustrate this choice on an optimal choice graph with F on the horizontal axis and C on the vertical axis. (b) It has been recently discovered that it is healthy to consume at least F=8. The government is considering giving consumers a subsidy that would make them consume F=8. How large would the cash subsidy need to be? Show her optimal basket with the cash subsidy on the same graph. (c) Alternatively the government is also considering giving consumers food stamps, that is, vouchers with a cash value that can only be redeemed to purchase food. Verify that if the government gives Jane vouchers worth $16, she will choose F = 8. Illustrate her optimal choice on the same graph.