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- The state of M is thinking of 2 ways to fund local roads, matching grants and block grants. If the case of the matching grant, state M will spend 1$ for each dollar that localities spend.
a. What is the price of an additional dollar of local spending in each case (matching grant or block grant)?
b. Which do you think will lead to more spending at the local level on roads? Why? - State D has 2 types of towns, well-off Type A towns and poorer Type B towns. The wealthier type A towns have more to spend on education, and their demand curve for education is Q = 100 − 2 • P, where P is the price of a unit of education. Type B towns have demand Q = 100 − 5 • P.
a. If the cost of a unit of education is $15 per unit, what is the number of units of education that each of the two towns will demand?
b. State D sees that there are big quality differences across the two types of towns. So, the state plans to redistribute from Type A towns to Type B towns. They tax Type A towns by $5 per unit of education they provide, and give a subsidy of $5 for each unit of education they provide. What are the new tax prices of education in the two towns? How many units of education does 1 each town want?
c. State D wants to get an equal number of units of education for both types of towns, by taxing the Type A towns, and subsidizing the Type B towns for each unit of education. It wants to do this is a way that the taxes on the Type A towns (total) offset the subsidies for the Type B towns (total). If there are 4 Type A towns for each set of 5 Type B towns, what is the tax the Type A towns should pay per unit of education? The subsidy per unit of education for the Type B towns? 3. Suppose a family with 1 child has $20,000 per year to spend on private goods and education, and suppose all education is provided privately. Draw the family’s budget set. Suppose now there is free public education available, at a price of $4000 per year per child. Draw 3 different indifference curves for each of 3 types:
1) those where free education would lead to an increase in the amount of education spending for their kids,
2) those for whom the free option leads to less total spending on education for their kids, and
3) those for whom the free option leaves their spending on education unchanged. - True or false and explain. The signaling model of education suggests that the government should invest a lot in supporting public education.
- The problem of adverse selection in insurance markets means it is generally a bad idea for companies to offer insurance at the same price for all potential customers. Why do we see some companies (such as those selling “trip” insurance that refunds money to those who can’t take their planned trips) do exactly this?
Sample Solution
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