Question

The (identical) citizens of Boomtown have $2 million to spend either on park maintenance or private goods. Each unit of park maintenance costs $10,000.

(a) Graph Boomtownís budget constraint.

(b) Suppose that Boomtown chooses to purchase 100 units of park maintenance. Draw the town's indifference curve for this choice.

(c) Now suppose that the state government decides to subsidize Boomtown's purchase of park maintenance by providing the town with 1 unit of maintenance for every 2 units the town purchases. Draw the new budget constraint. Will Boomtown purchase more or fewer units of park maintenance? Will Boomtown purchase more or fewer units of the private good? Illustrate your answer and explain.

Answer 1

Boomtown's budget constraint can be graphed with the quantity of park maintenance on the x-axis and the quantity of private goods on the y-axis. If Boomtown purchases 100 units of park maintenance, it lies on the budget constraint line. If the state government provides a subsidy, Boomtown's new budget constraint will have a flatter slope and allow for the purchase of more park maintenance.

Step-by-step explanation:

(a) To graph Boomtown's budget constraint, we can plot the quantity of park maintenance on the x-axis and the quantity of private goods on the y-axis. The budget constraint is a straight line that passes through the point (200,0) on the y-axis and the point (0, 200,000) on the x-axis. It has a slope of -20. This line represents the combinations of park maintenance and private goods that Boomtown can afford with its $2 million budget.

(b) If Boomtown chooses to purchase 100 units of park maintenance, we can plot this point on the graph. This point lies on the budget constraint line. To draw the indifference curve, we need to know Boomtown's preferences. Without this information, we cannot accurately depict the indifference curve.

(c) If the state government decides to provide a subsidy, the new budget constraint will have a different slope. For every 2 units of park maintenance that Boomtown purchases, the government will provide 1 unit for free. This means that Boomtown can now obtain more park maintenance for the same budget. The new budget constraint will have a flatter slope and will allow Boomtown to purchase more units of park maintenance.