ECON1056 Price Theory

Policy Inquiry

REPORT | ECON1056 Price Theory Policy

Inquiry
Contents
Introduction...........................................................................................................................................2
Analysis..................................................................................................................................................2
Discussion..............................................................................................................................................3
Conclusion.............................................................................................................................................4

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Introduction
In this assignment we have to play role of a professional economist, assessing the likely
impacts of the policy proposal detailed according to the scenario which is given to us. We try
to determine the optimal voucher value as a function of household income the government of
the island nation of Autarka has become increasingly concerned about the health and
wellbeing, according to estimation average household takes about 5 kg of fruits and
vegetables weekly and as we know that the government has proposed implementing a new
voucher scheme to ensure that the 5kg per week consumption target is met. Under the
government’s proposal, the vouchers would be redeemable for fresh fruit and vegetables, but
could not be used for other types of food, or for non-food consumption. So, we need to find
the lowest possible level of income (I) for which x is 0. Moreover, to limit the cost of the
voucher scheme, the value of the vouchers sent to a household would be linked to the
household’s income.

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words]

Analysis
We are going to use a general utility maximization method to answer this question.
Optimal value of consumption for fruits & vegetables and composite good can be obtained as
below

MRS = Px/Py

MRS = y/(x+24)

y/(x+24) = 10

y = 10x+240---Equation 1

Budget constraint equation can be given as below

10x+y =I

Substituting equation 1 in the above equation.

10x+10x+240 =I

20x = I-240

x =(I-240)/20 = 0.05I-12 --- Demand function for good x.

y = 0.5I+120---- Demand function for good y.

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So we need to find the lowest possible level of income (I) for which x is 0.

0 =0.05I-12

12 = 0.05I

I = 12/0.05 =$ 240.

Now if government intends to increase the consumption of fruits and vegetables to 5kg then
we need to set the value of x equal to 5.

5 = 0.05(240+v)-12

Now in 240+v is the sum of lowest value of income level above which positive consumption
of fruits and vegetables is possible and v is the maximum value of voucher.

5 = 0.05(I+v)-12

5 = 0.05I+0.05v-12

17-0.05I = 0.05v

340-I = v

Therefore, general value of voucher as a function of I is v =$(340-I) where 0<I<340

Discussion
In my recommendation what the government is supposed to do is that, government can set the
value of voucher at most equal to v= $100 when I =$240 this would basically ensure that the
5kg per week consumption target is met and people would take care of their health in a better
way and the issue which Community groups in Autarka have expressed concern that a
voucher scheme would also be solved. Community groups in Autarka have expressed
concern that a voucher scheme is unnecessarily paternalistic; depriving low-income
households of the choice of how to spend their income. These groups argue that the
government’s consumption targets could be met just as well using transfers (monetary
payments from the government to the low-income households). Transfers, they argue, would
empower low-income households to make their own consumption decisions. government has
proposed implementing a new voucher scheme to ensure that the 5kg per week consumption
target is met. Under the government’s proposal, the vouchers would be redeemable for fresh
fruit and vegetables, but could not be used for other types of food, or for non-food
consumption. Moreover, to limit the cost of the voucher scheme, the value of the vouchers
sent to a household would be linked to the household’s income.

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Conclusion
In a nutshell we can say that we have used utility maximization theory for the purpose of
finding optimal value of consumption of fruits and vegetables in which government of the
island nation of Autarka is playing very crucial role and has become increasingly concerned
about the health and wellbeing of low-income households. As a result, composite good we
have achieved. Where the V= $100 and I= $240. Now if government intends to increase the
consumption of fruits and vegetables to 5kg then we need to set the value of x equal to 5.
Now in 240+v is the sum of lowest value of income level above which positive consumption
of fruits and vegetables is possible and v is the maximum value of voucher. Therefore,
general value of voucher as a function of I is v =$(340-I) where 0<I<340. For example,
government can set the value of voucher at most equal to v= $100 when I =$240.

x =(I-240)/20 = 0.05I-12 --- Demand function for good x.

y = 0.5I+120---- Demand function for good y.

[175
words]

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