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ps2x313_f08

# ps2x313_f08 - Econ 3130.1 Wissink Fall 2008 PS#2 – XtraQ...

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1. Central High School (CHS) gets utility from spending money on computers and sports: u = u(C, S) where C = \$spent on computers and S = \$spent on sports. Central High School has \$60,000 to spend on computers and sports, so its budget equation is C + S = \$60,000. CHS has preferences that can be represented by the utility function U(C, S) = CS 2 . The State Education Commission wants to encourage "computer literacy" at CHS. The following plans have been proposed. Plan A : This plan would give a grant of \$10,000 to CHS and the school could spend it as it wishes. Plan B : This plan would give a \$10,000 grant to CHS, so long as CHS spends at least \$10,000 more than it spends without any plan for computers. CHS can choose not to participate, in which case it does not receive the grant, but it doesn't have to increase its expenditure on computers. a) Draw the original budget line and the budget lines for Plan A and for Plan B. b) Find the “no-plan status quo” expenditures on computers and sports that maximizes CHS’s utility subject to its budget constraint. Show the utility maximizing choice on your graph.

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ps2x313_f08 - Econ 3130.1 Wissink Fall 2008 PS#2 – XtraQ...

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