We now focus on one country. Assume that the society is composed of two individuals A and B. The total income available in the society is $550,000. The utility of individual A is given by UA = VIA and individual B ones is given by UA = 0.5/IB. b) What should the income distribution be for the individuals to have the same utility level? c) Find the income distribution that maximizes social welfare in the case of an additive social welfare function. Now imagine that in reality, individual A has an income of $500,000 and individual B's income is $50,000. d) How far from the optimal income distribution defined in question c) are we? What redistri- bution should be chosen to reach the optimal social welfare calculated in c)?

We now focus on one country. Assume that the society is composed of two individuals A and B. The total income available in the society is $550,000. The utility of individual A is given by UA = VIA and individual B ones is given by UA = 0.5/IB. b) What should the income distribution be for the individuals to have the same utility level? c) Find the income distribution that maximizes social welfare in the case of an additive social welfare function. Now imagine that in reality, individual A has an income of $500,000 and individual B's income is $50,000. d) How far from the optimal income distribution defined in question c) are we? What redistri- bution should be chosen to reach the optimal social welfare calculated in c)?

Microeconomics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506893

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter15: Income Inequality And Poverty

Section: Chapter Questions

Problem 15CQ

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