Problem 2:

Intergovernmental Grants. State College, PA has total income of 180 to be spent on a new sports stadium and private goods. Both goods are normal goods (an increase in income leads to an increase in demand for both).

a) Draw State College's budget constraint (put stadium spending on the horizontal axis and private goods spending on the vertical axis).

b) The state of PA wants to implement a one-for-one matching grant for stadium spending. Draw State College's new budget constraint with the matching grant.

c) Instead of a matching grant, State College wants to implement an unconditional block grant of 90 to be spent on either good. Draw State College's new budget constraint with the block grant.

d) In the absence of any grant, State College will choose to spend 135 of their own income on the stadium and the remaining 45 on private goods. With the matching grant in part b), State College will choose to spend 90 of their own income on the stadium and the remaining 90 on private goods. Plot these on your graph.