Exercise 7

Carlos Graterol 1.A) 1/3 B.) 2/3 or 66.7% C.) 1/3 or 33.3% D.) 15% E.) $1.15 F.) $383.33 G.) 39.13% H.) $766.67 I.) Proposition: Even though total expenditure on the public service increases when the community receives a grant, the community may spend less of its own local funds on the public service. Suppose the median voter’s demand for the public service is inelastic with respect to the tax-price. (According to Fisher, Table 4-1, the demand for most public services is inelastic.) The matching grant reduces the price, but the percentage increase in the median voter’s desired expenditure on the public service is smaller than the percentage reduction in price. Therefore, the community actually spends less of its own local funds on the public service with the grant than it would spend without the grant. 2.) 2A) 7.67% B) .6 C) 8000 D) 7.83% 3) Matching grant income and expenditure. The lump sum only has an income effect. The income effect of the matching grant is identical to the income effect of the lump-sum grant. But the matching grant also lowers the median voter’s marginal tax-price, making the public service cheaper and more attractive than alternative goods and services, public and private. 4A). No, because the $383.33 is below the price ceiling but at an amount below the max grant level, the grant acts the same. B) Yes, because it’s lower than the efficient quantity and people would not be willing to pay up to the amount of $383.33. C) No, it’s the same effect. 5) Both the general grant and the categorical grant have the same effect on urban mass transit spending. Restricting use of the grant to urban mass transit has no effect on total expenditure because the grant simply replaces other funds that the community would have spent on urban mass transit, allowing those funds to be reallocated to other publiclyor privately-provided services.