A State Is Spending $40 Million on Highway Improvements

question 6

Multiple Choice

A state is spending $40 million on highway improvements.If the federal government promises to pay the state $0.25 for every $1 spent by the state on highway improvements,and if highway improvements are a normal good,the income effect induces the state to spend _________ on highway improvements; the substitution effect induces the state to spend _________ on highway improvements.

• A) less; less
• B) less; more
• C) no more or less (there is no income effect); more
• D) more; more