Consider three households earning an after-tax income of $5,000 per month. Each family has preferences that take the following form:

Family A: = 0.3 ln() + 0.7 ln()

Family B: = 0.5 ln() + 0.5 ln()

Family C: = 0.8 ln() + 0.2 ln()

where U denotes utility, I is internet connection speed measured in Mbps and G refers to any other good/service that the family buys. The price of I is $10 and the price of G is $100. Each family has to decide how to allocate their budget between goods I and G.

c) suppose that the government determines that internet access is a necessity and that families should have an internet speed of at least 10 Mbps to be able to access public services offered online (e.g. online schooling). For this reason, the government decides to use tax revenue to provide an internet connection speed of 10 Mbps for free to all families. Households can now choose between the package offered by the government for free (10 Mbps) or the packages offered by the private sector with a price of $10 per Mbps. They cannot combine packages, they either choose the publicly provided Internet package or the privately provided internet package. Indicate which family would switch to the publicly provided package and why. Show your calculations. Use a graph to compare the optimal bundles in part (b) to the optimal bundles in part (c) - the graph should have I on the horizontal axis and G on the vertical axis. Compute the total amount of money that the government spends on this program. In this case, is there any evidence of crowding out resulting from the public provision of I?