A city is spending $1 million on policing and receives a one-for-one matching grant of up to $2.5 million 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 matching grant effectively increases the city's income or budget for policing, allowing them to spend more. The substitution effect also increases spending on policing because the grant makes spending on policing relatively more attractive compared to other uses of funds, assuming the grant can only be used for policing and not for other services.

A City Is Spending $1 Million on Policing and Receives