Problem
The state of Minnegan is considering two alternative methods of funding local road construction, matching grants and block grants. In the case of the matching grant, Minnegan will spend $1 for every $1 spent by localities.
1. What is the price of an additional dollar of local spending in the case of a block grant?
2. What is the price of an additional dollar of local spending in the case of the matching grant?
3. The method that will likely lead to higher levels of local spending on roads is the (block/matching) grant because of the (income/substitution) effect.