Problem
Public School Finance (30 points). Bakersfield, California has 100 families, and each family earns $300 in income before taxes. Together, they have $30,000 of income to collectively spend on free public education and private goods. In each of the following parts, Bakersfield receives a grant from the state of California and chooses a level of education spending. The local contribution to education spending is funded through a lump-sum tax (i.e. every family pays the same amount) and is used to fund free public education. Finally, each family chooses a level of education spending for their child.
Suppose that California implements a one-for-one matching grant, and Bakersfield chooses to spend $10,000 of their total income on education. The ranking level of free public education spending is Ek, = $100 per child.
• Graph the budget set faced by each family. Find and label all relevant points and axes. On the graph, plot three families' optimal points and indifference curves. Families A and B choose public school, while Family C chooses private school.