Question

Suppose a family with 1 child has $20,000 per year to spend on private goods and education, and suppose all education is provided privately. Draw the family’s budget set. Suppose now there is free public education available, at a price of $4000 per year per child. Draw 3 different indifference curves for each of 3 types: 1) those where free education would lead to an increase in the amount of education spending for their kids, 2) those for whom the free option leads to less total spending on education for their kids, and 3) those for whom the free option leaves their spending on education unchanged.

Answer 1

ANSWER :

The family with indifference curves labeled Below :-

(a) Thus consuming very little education prior to the introduction of the public education program (A).

The public education program is introduced, they move into the public education system; their consumption of education increases to $4, 000 and their consumption of other goods goes up to $20, 000.

(b)Thus consuming slightly more than $4, 000 in education prior to the introduction of public education (B).

The system is introduced, this family also moves into the public education system. The move involves a reduction in their education spending, but the large increase in their spending on other goods more than compensates them, and they are better off.

(c) It  is unaffected by the introduction of public education. They value education highly enough that the increase in non-education spending they could achieve by switching to the new public education system is not enough to compensate them for the reduction in spending from C to $4, 000.