A city that is currently spending $1 million on policing receives a one-for-one matching grant of up to $2.5 million to spend on policing.Assume policing is a normal good,as are other programs paid for by the city.The income effect ___________; the substitution effect ___________.

Question

Quizplus · Accepted Answer

The income effect increases spending on non-policing programs because the grant effectively increases the city's budget, allowing more spending on all normal goods. The substitution effect increases spending on policing because the grant makes additional spending on policing relatively cheaper.

A City That Is Currently Spending $1 Million on Policing