QUESTION 3

(a) A town has three families, each with one child, and each of which earns $20,000 per year

(pre-tax). Each family is taxed $4,000 per year to finance the public school system in the

town, which any family can then freely attend. Education spending is $6,000 per student

in the public schools. The three families differ in their preferences for education. Though

families A and B both send their children to the public school, family B places a greater

value on education than family A. Family C places the greatest relative value on education

and sends its child to private school. Graph the budget constraints facing each of the three

families and draw a possible indifference curve that could correspond to the choice each

family makes, providing a brief explanation. (3 points)

(b) The town is considering replacing its current system with a voucher system. Under the

new system, each family would receive a $6,000 voucher for education, and families

would still be able to send their children to the same public school. Since this would be

more costly than the current system, they would also raise taxes to $6,000 per household

to pay for it. Draw the budget constraint the families would face under this system and

provide an explanation. (3 points)

(c) Suppose that, when the new system is introduced, family A continues to send their child to

public school, but family B now sends their child to private school (along with family C's

child).

(i) Explain how you know that family C is made better off and family A is made

worse off by the voucher policy. (2 points)

(ii) Show, using diagrams, that family B could be made better or worse off by the

voucher policy. (2 points)

QUESTION 3 (a) A town has three families, each with one child, and each of which earns $20,000 per year (pre-tax). Each family is taxed $4,000 per year to finance the public school system in the town, which any family can then freely attend. Education spending is $6,000 per student in the public schools. The three families differ in their preferences for education. Though families A and B both send their children to the public school, family B places a greater value on education than family A. Family C places the greatest relative value on education and sends its child to private school. Graph the budget constraints facing each of the three families and draw a possible indifference curve that could correspond to the choice each family makes, providing a brief explanation. (3 points) (b) The town is considering replacing its current system with a voucher system. Under the new system, each family would receive a $6,000 voucher for education, and families would still be able to send their children to the same public school. Since this would be more costly than the current system, they would also raise taxes to $6,000 per household to pay for it. Draw the budget constraint the families would face under this system and provide an explanation. (3 points) (c) Suppose that, when the new system is introduced, family A continues to send their child to public school, but family B now sends their child to private school (along with family C's child). (i) Explain how you know that family C is made better off and family A is made worse off by the voucher policy. (2 points) (ii) Show, using diagrams, that family B could be made better or worse off by the voucher policy. (2 points)