File:Pds diagram 2.png

English: Panel 1 shows the effect of food stamps on consumption the initial position Q on the indifference curve U0 is the same as it was in panel 1. The food stamp is like additional cash which the consumer receives to spend on a specific set of goods. The distance KK’ represents the amount of the gift, so that the consumer’s budget line shifts outward from KL to K’L’. But this increase in income can only be used on E. Thus the consumer cannot reach the dashed part of the budget line between K’ and K’’. Therefore the new budget line for the consumer is the kinked line KK’’L’. The new optimum is at S on U1. Food stamps will increase purchase of commodity E, whenever E has a positive income effect. So it simply appears that due to the stamps the consumers have special power with them.