The U.S. government squanders over $15.8 billion on its Food Stamp Program to aid many poor Americans. The average food stamp benefit is around $170 per month. Suppose that, in the absence of food stamps, the average consumer should divide $500 in monthly income between food and "all other goods" such that the following budget constraint holds: $500=$10A+$5F, where A is quantity of "all other goods," and F is quantity of food purchased. Using the vertical axis for the "all other goods," draw the consumer's budget line in absence of Food Stamp Program. What is market rate of substitution between food and "all other goods"? On same graph, demonstrate how the Food Stamp Program changes the average consumer's budget line. Would this consumer benefit from illegally exchanging food stamps for cash?
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