Managerial Economics & Organizational Architecture 6th Edition by James Brickley , Clifford Smith ,Jerold Zimmerman

Exercise 17

In order to spur consumer spending in 1998, the Japanese government considered an $85 billion voucher system whereby every Japanese consumer would receive a shopping voucher that could be used to purchase Japanese products. For simplicity, assume the following: Each consumer has wealth of 1 million yen, consumers must allocate this wealth between consumption now ( c 1) and consumption later ( c 2), the interest rate is zero, the voucher is worth 100,000 yen, and it can be spent only in the current period. If it is not spent, it is lost.
a. Plot a budget line for a representative consumer both before and after the voucher program ( c 1 and c 2 are on the axes).
b. Do you expect that current consumption of a typical consumer will increase by the full 100,000 yen of the voucher Explain.
c. How does the impact of this 100,000-yen voucher differ from simply giving the individual 100,000 yen