Suppose the federal government provides Terrytown with a very generous matching grant. They provide

$2 of road maintenance for every $1 that Terrytown spends (2 for 1 matching grant).

b. Write down the budget constraint under this matching grant.

c. Solve mathematically for the revised spending on road maintenance and the total size of the

grant.

d. Is this increased spending a result of the income effect, substitution effect, or both? Explain