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How many units of food does she consume

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Martha purchases food (F) and other goods (Y) with the utility function U(F,Y)= FY . Her income is N$24. The price of food is N$2 and the price of other goods N$1.

-How many units of food does she consume when she maximizes utility?

-The government has recently completed a study suggesting that, for a healthy diet, every consumer should consume at least F=14 units of food. The government is considering giving a consumer like Martha a cash subsidy that would induce her to buy F=14. How large would the cash subsidy need to be? Show her optimal basket with the cash subsidy on an optimal choice diagram with F on the horizontal axis and Y on the vertical axis.

B) As an alternative to the cash subsidy in part 2, the government is also considering giving consumers like Martha food stamps, that is, vouchers with a cash value that can only be redeemed to purchase food. Verify that if the government gives her vouchers worth $28, she will choose F=14. Illustrate her optimal choice on an optimal choice diagram. (You may use the same graph you drew in A) part 2.

Reference no: EM132542153

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