Economic Analysis of Public Policy Problem Set

1. An Op-Ed article by Martin Schmidt published in the New York Times on October 19th 2006 argued in favor of a tax on drive-through food orders as a method for reducing obesity (article attached). He suggests a 10% tax on the amount of drive-through food purchases. Instead of a percentage tax, consider a flat tax on each drive-through order (this type of tax fits with our taxation model at the end of chapter 9). Do you think this proposal would reduce obesity? Why? Start your analysis by showing the impact of the tax on the quantity of drive through meals consumed. Also consider the spillovers this tax may have on other types of food consumption.

2. Budget Constraints

a. Assume that housing and food arc the only goods available. A family's budget is $800 a month. Assume the price of food is equal to $4 and the price of housing is equal to $5. Draw the budget constraint for this family.

b. Draw the budget constraint if the family is given a TANF grant of $1200 a month and prices and other income are the same as in part A. There is no restriction on how TANF grants may be spent.

c. Draw the budget constraint if the family is given a housing voucher worth $ 1200 a month and prices and other income are the same as in part A. Housing vouchers may only be spent on housing.

d. Draw the budget constraints if the family is given public housing worth $1200 a month and prices and other income are the same as in part A. Assume public housing does not cost the family anything. Also assume that if a family lives in public housing, they cannot use their own money to increase the size of the public housing unit they are renting.

Hint: Even though public housing does not cost the family anything, your budget constraint must show the value of the public housing to the family. The reason is that the budge constraint shows all of the possible choices available to the family.

3. Optimal Choice

Assume Carolyn is given a bundle on her budget constraint where her MRS_FC = 2. Also assume the price of a unit of food equals $3 and the price of a unit of clothes equals $6. Should Carolyn buy more food or more clothes to maximize her utility? Why? Explain in detail.

4. Effect of Government Programs

Assume that the budget constraint shown is for $600 of income with a price of food equal to S2 and a price of clothes equal to $4, With an indifference curve and budget constraint as shown, will a TANF grant of $200 have the same effect on food consumption as $200 in food stamps? Why? Explain in words and graphically. Note that you must use the scale provided in the picture.

Attachment:- Assignment.rar