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

(a) Boomtown's Budget Constraint: Boomtown can afford to spend on upto 200 units of park maintenance or complete $ 2 Million on private goods. Trade off, at a constant rate, would be $10,000 of private goods per 1 unit of park maintenance. Budget constraint is depicted by the line segment crossing/connecting at 200 units or park maintenance and $ 2 Million spend on private goods.

Budget Constraint Graph 300 Private Goods 200 100 0 $1 Million $2 Million $ 3 Million Park Maintenance Cost

(b) Indifference Curve if Boomtown chooses to purchase 100 units of park maintenance: Indifference curve of the said choice is reflected by the tangent at the point of 100 units and $ 1 Million on graph in Answer (a)

(c) As per the change in policy, Boomtown can now procure 300 units of park maintenance if they decide to spend all their money on it. This change won't have any impact on the quantity of private goods that Boomtown can purchase for the said amount. Budget constraint, under reviewed circumstances would change and now intersect at the point of (0, 300 units) thus showcasing the change in number of park maintenance they can afford. Refer below iIllustration.

Multiple combinations of Boomtown choosing between Park Maintenance and Private goods can exist.