Several years ago the city of Berkeley, California, set up a program allowing residents to buy vouchers from local merchants that they could give to homeless people instead of cash. The perceived problem with cash was that it could "all too easily be used for drugs and liquor". In contrast, the vouchers could be redeemed in local stores only for items such as laundry service and food. In this problem, you will analyze the voucher program.
The figure at the end of this problem set depicts the indifference map of Oedipus, a rep- resentative homeless person in Berkeley. Assume that all goods are priced at $1 per unit. Each week, Oedipus receives $5 in cash and $20 in vouchers.
- Assuming that it is impossible to sell the vouchers, sketch the budget constraint asso- ciated with $5 in cash, and show how the constraint changes when Oedipus receives $20 in vouchers in addition. Please make your drawing on the figure at the end of the problem set.
- Compare the consumption bundle to the bundle that would have been consumed if Oedipus received his entire income in cash (i.e., if he would have received $25 in cash instead of $5 in cash and $20 in vouchers).