ECON1056:You will take the Role of a Professional Economist, Assessing the Likely Impacts of the Policy Proposal: Price Theory Assignment, SIM, Singapore

introduction: In this assignment you will take the role of a professional economist, assessing the likely impacts of the policy proposal detailed in section 2. You will analyze the policy problem using the techniques developed in topics 1–5, and prepare a research report detailing your findings and their implications.

Scenario
The government of the island nation of Autarka has become increasingly concerned about the health and wellbeing of low-income households. Medical experts stress the importance of a healthy diet in this regard. They have determined that, ideally, a household would consume at least 5kg of fresh fruit and vegetables each week.

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. 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.

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.

2.1 Your task

Your task is to determine the optimal voucher value as a function of household income. The voucher must implement the government’s target of 5kg of fresh fruit and vegetables consumed per week while minimizing the cost of the vouchers to the government. You are also to assess the community groups’ claim that a transfer scheme would implement the government’s targets just as well. Do you think that the community groups are motivated by the health outcomes associated with a good diet? Or might they have another objective?

2.2 Household preferences

Using data from household surveys, you have determined that the ‘typical’ household’s preferences are represented by the utility function,
U = (x + 24)y,
where x represents the quantity of fruit and vegetables consumed, and y represents the quantity of the composite good consumed. The associate marginal utilities are,
MUx = y and MUy = x + 24.
The price of fruit and vegetables is Px = $10 per kg, and the price of the composite good is normalized to Py = 1.