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Question: the identical citizens of boomtown have 2 million to spend...

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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.

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