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 in the price of milk. Suppose also that poor families buy only milk and Spam (an inferior good). What happens to the amount of Spam 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 increases the real income of poor families, allowing them to buy more normal goods like milk and less of the inferior good, Spam.

Suppose the Government Decides to Help Poor Families with Kids