public finance-chapter10solutions新.pdfVIP

Solutions and Activities to CHAPTER 10 STATE AND LOCAL GOVERNMENT EXPENDITURES Questions and Problems 1. The (identical) citizens of Boomtown have $2 million to spend either on park mainte- nance or on private goods. Each unit of park maintenance costs $10,000. a. Graph Boomtown’s budget constraint and draw in a representative indifference curve of your choosing. How many units of park maintenance will Boomtown pur- chase with the indifference curve you have drawn? If the Boomtowners spent their entire $2 million on park maintenance, they could purchase 200 units of that public good, as illustrated in the accompanying figure. Park Maintenance (units) 200 100 0 $1 million $2 million Private Goods The tangency of the indifference curve to the budget constraint in this example is at approximately 100 units of park maintenance and 1 million units (at $1 per unit) of pri- vate goods. b. Now suppose that the central government purchases one unit of park maintenance for each three units that Boomtown purchases. Draw the new budget constraint and a new representative indifference curve. Now how many units of park mainte- nance will Boomtown purchase? How has that changed from a and why? For each three units of park maintenance Boomtowners purchase themselves, they acquire a total of four units; therefore, the budget constraint pivots to a new axis inter- cept: from 200 to 267 (200 × 1.3333). This makes them better off, and so the income ef- fect in