The central government match a local governments $1 expenditure on education by $0.25.

(5%) How does this matching grant affect the price of education for the local government?

(5%) Draw a graph with the private consumption on the vertical axis and the expenditure on education on the horizontal axis. Then utilize community indifference curve and the local government budget constraint to analyze how this matching affect the local governments spending on education? Please note the substitution effect and the income effect on the graph.

b. (10%) The central government changes its grant to local education spending from a one-to-one matching basis to an unconditional grant.

(5%) What percentage change in the price of local education would the change cause?

(5%) If the price elasticity of local spending on education is -0.5, how would you expect local education spending to change?