Contrasting price and income subsidies

    Consider the Smiths, a low-income family which has a $400 income to spend on food (F) [market price = Pmkt = $10 per meal], with the rest spent on other goods (Io).

    Option 1: the government offers a 50% food price subsidy, so the Smiths pay a subsidized price = Psub = $5 per meal
    Option 2: the government offers the Smiths a utility-equivalent income subsidy.

To do: Complete the following table:

Tax and rebate policy

Consider the following passage from N. Gregory Mankiw's blog, Thursday, February 05, 2009
    My Preferred Fiscal Stimulus
    Regular readers of this blog have a pretty good sense of my policy preferences. But for those occasional readers who might be stopping by, let me reiterate what I would do right now if I were the fiscal king.
    I would institute an immediate and permanent reduction in the payroll tax, financed by a gradual, permanent, and substantial increase in the gasoline tax. I would make the two tax changes equal in present value, so while the package results in a short-run budget deficit, there is no long-term budget impact. Call it the create-jobs, save-the-environment, reduce-traffic-congestion, budget-neutral tax shift.

How would that work?

To do: Complete the following table and answer the two questions below the table:
(Hint: you might find it helpful to answer the two questions below the table before trying to complete row (3) of the table)

Characteristics of the final new optimum with the gas tax revenue exactly matched by a cut in payroll taxes:
(1) Circle the budget line you would be on:  BLa  /  BLb
(2) What would be the value of your optimal MRS? $_________