Problem 4: Intergovernmental Grants. The Trenton, NJ school district has total income of 1000 to be spent on either a public schools or private goods.

a) Draw Trentons budget constraint with no grant. (Put school spending on the horizontal axis and private goods spending on the vertical axis).

b) The state of NJ wants to implement a two-for-one matching grant to increase school spending. That is, for every one dollar Trenton spends on public schools, NJ will contribute two additional dollars to be spent on public schools. Draw Trentons new budget constraint with the matching grant.

c) What is the tax price of this two-for-one matching grant? Briefly justify your answer.

d) In the absence of any grant, Trenton will choose to spend 500 on schools and 500 on private goods. With the matching grant in part b), Trenton spends 400 of their own income on schools and 600 on private goods. Plot the relevant points on your graph.

e) How much does the two-for-one matching grant cost the state of NJ? Plot the budget line for the block grant that costs the same amount.