Using Figure 17–7 as a starting point, suppose the initial utility-maximizing spending on special education is $5 rather than $25. As before, the lump-sum conditional grant for special education is $20. The income elasticity of demand for special education is 1.0. a. Show the response of the median household to the grant, with the new utility-maximizing point labeled j . b. The grant increases spending on special education by _____ and increases spending on other goods by _____ . c. The lesson from this example is that the stimulative effect of a grant is relatively large when...

QUESTION:

Corner Solution

Using Figure 17–7 as a starting point, suppose the initial utility-maximizing spending on special education is $5 rather than $25. As before, the lump-sum conditional grant for special education is $20. The income elasticity of demand for special education is 1.0.

a. Show the response of the median household to the grant, with the new utility-maximizing point labeled j.

b. The grant increases spending on special education by ______ and increases spending on other goods by ______.

c. The lesson from this example is that the stimulative effect of a grant is relatively large when . . .