Reference no: EM132197797
Quesiton: A typical local school board must divide its annual budget between teacher's salaries and computers for the classroom. The cost of a computer is $1000 and the yearly salary of a teacher is $50,000. The school board has a total annual budget of 10,000,000.
a) Putting computers on the x-axis and teachers on the y-axis illustrate the school board's budget set. What is the opportunity cost of one additional teacher?
The federal government would like to promote the use of computers in the classroom. One way to do so would be to provide free computers to the school district. Assume that the federal government supplies 1000 free computers to the local school board at a total cost to the federal government of 1,000,000.
b) In your diagram for part (a) illustrate the school board's new budget set.
c) Show (algebraically) that the school board can now afford to consume the bundle (2000,180). Assuming that this bundle is the best bundle on the budget line from part (b), illustrate an indifference curve passing through this point in your diagram for part (a). Indicate in your diagram the value of the subsidy in number of additional teachers that the school board can afford.
Senator Mock dislikes the idea of forcing school boards to take a fixed number of computers when they might prefer to spend their federal subsidy on additional teachers. He claims that economics has taught him that it is best to allow individuals to make their own decisions regarding the allocation of their resources. As a consequence,he proposes instead to simply subsidize the purchase of computers.
d) His first proposal is to set the subsidy per computer so that the school board could continue to afford 2000 computers. In particular,the per-unit subsidy would be set equal to $1,000,000/2000 = $500 per computer. Illustrate in your diagram from part (a) the new budget line associated with the $500 per computer subsidy. Will the school board buy more or less than 2000 computers? Will the cost to the government be more or less than the $1,000,000 the government spent on the original program? Indicate in your diagram the cost to the federal government of the $500 subsidy.
Redraw your budget set from part (a) below. Include in your diagram your budget line from part (b), the bundle (2000,180) and the indifference curve through this bundle.
e) His second proposal is to set the value of the subsidy so that the school board is no better off with the subsidy then it was with the original program (the free computer program). In your new diagram draw the budget line that would result from such a subsidy (that makes the school board equally well off). Is the value of that subsidy less than or greater than $500 per computer? Will the school board buy more or less than 2000 computers? Will the cost to the government be more or less than the $1,000,000 the government spent on the original program? Indicate in your diagram the cost to the federal government of this subsidy.