1 Suppose you are hired as an economic consultant to the US government concerning public assistance policy for the "unemployed in the current economic downturn". The government is considering two policies: 1) in kind transfers of paper vouchers to families that can be exchanged for food or 2) a direct cash payment (of an amount equal to the value of the paper vouchers) that can be used for any purpose. A family cannot receive both.

a) Which program do you think most families would choose?

b) Why?

c) Which program makes families better off?

d) Why?

2 The table below gives the total utility that Newt receives from consuming whisky (utility measured in USD):

Glasses of Whisky Total Utility

0 $0
1 6
2 11
3 15
4 18
5 20
6 21
7 21

a) Calculate and graph the marginal utility (in USD) from each glass of whisky.

b) If the price of each glass is $5 (Newt is only interested in consuming single malt whisky), how many glasses will he purchase?

c) If the price falls to $3, how many glasses will he purchase?

d) Show how the MU curve relates to the demand curve in a separate diagram.

e) Suppose that the price per glass of whisky is $2. How many glasses will Newt buy at that price?

f) How much will Newt pay in total for these glasses of whisky?

g) What is the maximum amount that Newt is willing to pay to consume five glasses of whisky?

h) What is the difference between what Newt is willing to pay and what Newt actually pays to consume five glasses of whisky called?