Suppose there are only two people, Mr. Mullinax and Ms. Fleming, who must split a fixed income of $500. For Mr. Mullinax, the marginal utility of income is MU m = 600 - 2I m , while for Ms. Fleming, marginal utility is MU f = 600 - 3I f , where I m and I f are the amounts of income to Mr. Mullinax and Ms. Fleming, respectively.
(A) What is the optimal distribution of income if the social welfare function is additive?
(B) What is the optimal distribution if society values only the utility of Ms. Fleming? What if the
reverse is true? Comment on your answer.
(C) Finally, comment on how your answers change if the marginal utility of income for both Mr.
Mullinax and Ms. Fleming is constant such that Mu m = 250 = MU f . (This one is subtle.)
The setup should be I m + I f = 500 and 600 - 3I f = 600 - 2I m
(A) Solving this system of two equations and two unknowns gives I m = 300 and I f = 200.
(B) Since these two lines intersect at 0, the optimal distributions would remain I m = 300 and I f =
200.
(C) Since they are constant horizontal lines at $250, any distribution of the $500 will be
optimal.
You might also like to view...
The self-correcting property of the economy means that output gaps are eventually eliminated by:
A. increasing or decreasing potential output. B. government policy. C. decreasing inflation only. D. increasing or decreasing inflation.
Figure 4.3 illustrates the demand for tacos. Assume tacos are a normal good. An increase in income would bring about a movement from
A) point a to point b. B) point c to point b. C) D2 to D1. D) D0 to D1.
The rate of technological progress is an important determinant of ________
A) long-run variation in economic growth B) long-run increases in interest rates C) short-run variation in employment rates D) short-run variation in economic growth
In the United States, barriers to entry in professional team sports (for example, football and baseball) result from
A) the draft of college players, which grants teams exclusive signing rights to individual players. B) long-term leases teams sign for stadiums and ballparks in major cities. C) the reserve clause, which is a provision in contracts of professional athletes that require them to play for specific teams over the length of their contracts. D) television contracts, which give networks the exclusive rights to broadcast games.