The U. S. government spends over $33 billion on its Food Stamp program to pro-vide millions of Americans with the means to purchase food. These stamps are redeemable for food at over 160,000 store locations throughout the nation, and they cannot be sold for cash or used to purchase nonfood items. The average food stamp benefit is about $ 284 per month. Suppose that, in the absence of food stamps, the average consumer must divide $600 in monthly income between food and “all other goods” such that the following budget constraint holds: $600 = $12A+ $4F, where A is the quantity of “all other goods” and F is the quantity of food purchased. Using the vertical axis for “all other goods,” draw the consumer’s budget line in the absence of the Food Stamp program. What is the market rate of substitution between food and “all other goods”? On the same graph, show how the Food Stamp program alters the average consumer’s budget line. Would this consumer benefit from illegally exchanging food stamps for cash? Explain.
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