Applications of Consumer Choice Theory
The federal government wants to support education but must not support religion. To
this end, it gives the University of Notre Dame $2 million with the stipulation that this
money be used for secular (that is, not overtly religious) purposes only. The graph
below shows Notre Dame's pre-federal-gif budget constraint and utility.
(millions of dollars)
a)Reproduce the above diagram. On your diagram, show how the federal grant changes
Notre Dame's budget constraint.
b)Given the indifference curve drawn on the graph, would the university's welfare
change if the grant came without the secular-use restriction? Why or why not?
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