A city that is spending $1 million on policing receives a conditional grant of $500,000 to spend on policing.Assume policing is a normal good.The income effect ___________ spending on policing; the substitution effect ___________ spending on policing.

Question

Quizplus · Accepted Answer

The income effect increases spending on policing because the grant effectively increases the city's income, allowing it to spend more on a normal good like policing. The substitution effect does not affect spending on policing in this context because the grant is conditional on being spent on policing, leaving no room for substitution between policing and other goods.

A City That Is Spending $1 Million on Policing Receives