Question

The Economics Department has $60,000 to spend on computers (c) and other stuff (g), where Pc = Pg = 1. Suppose the department chair has derives utility from computers and other stuff in the following way: U(c, g) = cg². (Place “other stuff” on the y axis)

c. What happens to the budget constraint of the department if, instead of an outright gift of $10,000, the alumnus makes a matching gift of $0.50 for every dollar the department spends on computers?

d. How much will the department spend on computers now?

e. If the alumnus cares less about the department’s computer lab than anything else the department does, which method of funding will he choose? Explain

Answer 1

Ans A Given that, The EConomics depontment has60,000to S Computers C) and the stab L t spend n PC P 3) Now, due tb matching Tit 40, s- on lendin1 on on c 0. 5 Thus, be becomes -lat Rotates, o.5C+1-60000 →IBc Ca) Spendin on c PC e) choose ait ot $ 10000 because me spendi m on