Exam 5: Using Consumer Choice Theory

Show and explain why substituting an unrestricted cash transfer for an excise subsidy of equal cost to the government must lead to less consumption of the subsidized good and more consumption of other goods.

Comparing the original budget line with the budget line for an excise subsidy and a cash grant:

For a risk-loving individual,with return on the X-axis and total utility on the Y-axis,the slope of the total utility curve:

Which of the following is a consequence of subsidizing consumers using a per-unit excise subsidy for the purchase of some good or service as opposed to a lump-sum payment of an equal amount?

Figure 5-1 shows the preferences of a consumer for food and other goods.He is initially in equilibrium at point A where the budget line MN is tangent to the indifference curve. Figure 5-1 -In Figure 5-1,the effect of substituting an equal-cost lump-sum grant for an excise subsidy is to _____.