Consider the problem of optimal labor income taxation in a society where there are two types of wages (low and high) at the same proportion. Their utility functions are given by UL(YL, CL) = c_ – (4 and U#(Yµ,CH) = CH – (#) 2 (YH where Y; is type i's before-tax income, c¡ is consumption, and W; is type i's wage. Let low wage wL = 1 and high wage wh = 2. %3D (1) Find the budget constraints (i.e., the equations describing the relation between Y and c) when no taxation or subsidy exists. (2) Find the maximum value of the utilitarian social welfare U, + Uu.

Consider the problem of optimal labor income taxation in a society where there are two types of wages (low and high) at the same proportion. Their utility functions are given by UL(YL, CL) = c_ – (4 and U#(Yµ,CH) = CH – (#) 2 (YH where Y; is type i's before-tax income, c¡ is consumption, and W; is type i's wage. Let low wage wL = 1 and high wage wh = 2. %3D (1) Find the budget constraints (i.e., the equations describing the relation between Y and c) when no taxation or subsidy exists. (2) Find the maximum value of the utilitarian social welfare U, + Uu.

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter17: Income, Poverty, And Health Care

Section: Chapter Questions

Problem 11P

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