Assume that Jones has the following utility function: U(C, O) = C O , where
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Question:
- Assume that Jones has the following utility function: U(C, O) = C¼O¾, where C indicates the quantity of cheese consumed, and O indicates the quantity of other goods. Jones faces prices Pc = 2 and Po = 1 for cheese and other goods, respectively.
- Suppose Jones has an income of I = 300, How much Cheese and other goods would Jones consume?
- In addition to Jones’ initial income, assume the government gives a cash transfer of $120 to him. How much choose and other goods would Jones consume now?
- Suppose the government gives an in-kind transfer of 60 units of cheese to Jones as well, for which she cannot resell. How much cheese and other goods would Jones consume now?
- Which program, the cash transfer or in-kind transfer would be preferred by Jones?
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