Question: Currently, the U.S. government offers "food stamps" to poor Americans. These "stamps" are pieces of paper that look like Monopoly money and can be spent just like money at many grocery stores. The government has a complex formula that determines how much each poor person gets each month in food stamps (or more often these days, government-provided debit cards). Let's suppose that instead, the government decides to pay 95% of every poor person's food bill, as long as it is purchased at a typical grocery store: The poor person would make a "copayment" of 5% of the total bill, and the federal government would reimburse the grocery store for the remaining 95%. Just to keep things simple, let's assume that the government has a good way to make sure that poor people can't resell this food to others.

a. Which method would probably lead to more spending on food: the current method or the 5% copayment method? Why?

b. If food companies like Kellogg's and Quaker Oats start inventing new, more delicious dishes at a rapid rate, under which method will the federal government's food spending grow fastest: the current method or the 5% copayment method?

c. Which method is more like how most people pay for health care including the elderly and the poor under the federal government's Medicare and Medicaid programs: the current method or the 5% copayment method?

d. Recall that health care is a field of rapid innovation. How can your answer to parts b and c explain the rapid growth of medical spending?