8. Consider an economy with 2 individuals Micky and Nicky both contribute to charity. Nicky cares...

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8. Consider an economy with 2 individuals Micky and Nicky both contribute to charity. Nicky cares only about the total amount of money spent on charity. Micky also cares about charity, but is very competitive and is unhappy when Micky contributes more than he does. Suppose we can write Nicky's utility function as: UN = a(gM +9N) + In(TN) and Micky' utility function as: (9M +9N) UM=B +In(™M) 9N Where gM and 9N are Micky'a and Nicky's contributions to charity and TM and N are the amounts Micky and Nicky spend on other goods. Assume both people have the same income, M. a) If Micky and Nicky each aim to maximise utility, how much will each contribute to charity? Clearly show your working. Illustrate your answer using a diagram with gm on the vertical axis and gn on the horizontal axis. [7 marks] b) Suppose the government decides to tax both Micky and Nicky and gives the money to charity. How much will Micky and Nicky contribute to charity now? Clearly show your working. (Hint: replace gM +9N in the utility functions to reflect the total amount spend on charity.) Do total contributions to charity 1 go up? What is the intuition behind this result? [7 marks] c) What does empirical evidence suggest about the effectiveness of taxation in raising public good provision? Explain whether your findings in part (b) are or are not consistent with this evidence. [6 marks] 8. Consider an economy with 2 individuals Micky and Nicky both contribute to charity. Nicky cares only about the total amount of money spent on charity. Micky also cares about charity, but is very competitive and is unhappy when Micky contributes more than he does. Suppose we can write Nicky's utility function as: UN = a(gM +9N) + In(TN) and Micky' utility function as: (9M +9N) UM=B +In(™M) 9N Where gM and 9N are Micky'a and Nicky's contributions to charity and TM and N are the amounts Micky and Nicky spend on other goods. Assume both people have the same income, M. a) If Micky and Nicky each aim to maximise utility, how much will each contribute to charity? Clearly show your working. Illustrate your answer using a diagram with gm on the vertical axis and gn on the horizontal axis. [7 marks] b) Suppose the government decides to tax both Micky and Nicky and gives the money to charity. How much will Micky and Nicky contribute to charity now? Clearly show your working. (Hint: replace gM +9N in the utility functions to reflect the total amount spend on charity.) Do total contributions to charity 1 go up? What is the intuition behind this result? [7 marks] c) What does empirical evidence suggest about the effectiveness of taxation in raising public good provision? Explain whether your findings in part (b) are or are not consistent with this evidence. [6 marks]

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a To find the optimal contributions to charity for Micky and Nicky we need to maximize their respective utility functions For Nicky UN gM gN lnxN For ... View the full answer