Suppose the government decides to help poor families with kids by subsidizing the purchase of milk. The subsidy takes the form of a 50% discount on the price of milk. Suppose also that poor families buy only milk and soda, which are substitutes, although not perfect substitutes. What happens to the amount of milk poor families buy?
A) It increases.
B) It decreases.
C) It stays the same.
D) It depends on the shape of the family's indifference curve.

Question

Quizplus · Accepted Answer

The subsidy effectively lowers the price of milk, making it cheaper relative to soda. As milk and soda are substitutes, the lower price of milk will lead to an increase in the quantity of milk purchased by poor families.

Suppose the Government Decides to Help Poor Families with Kids