Question

(a) State N has a budget of $50 billion, which is spent on two things: Medicaid and Other Goods. Draw State N’s budget constraint. Suppose now the federal government offers a matching grant: for every dollar of Medicaid spending, the federal government pays for 90 cents, and State N only needs to pay 10 cents. In the same graph, draw State N’s new budget constraint with this matching grant.

(b) Suppose that without the matching grant, State N would spend $10 billion on Medicaid. Further suppose that instead of the matching grant in (a), the federal government will only provide a matching grant for the cost of Medicaid expansion. That is, for any additional spending on Medicaid beyond $10 billion, the federal government pays for 90% and State N only pays for 10%. Draw State N’s budget constraint now.

(c) Under the conditions described in (b), would State N choose to expand Medicaid beyond its current level ($10 billion)? Explain.

Answer 1