Suppose that an economy consists of two people: Ted and Jane. Their marginal utility functions are given
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a. Compute the optimal income distribution for the two people, assuming that society values each person’s utility equally, i.e. W = UT + UJ. Explain why this income distribution is optimal.
b. Draw a graph and identify the welfare loss to society of an egalitarian income distribution where Ted and Jane are each allocated income of 250. Explain why an egalitarian income distribution is typically non-optimal.
c. Explain the assumption made in this type of analysis regarding the relationship between the income distribution and the total income in the economy.
Distribution
The word "distribution" has several meanings in the financial world, most of them pertaining to the payment of assets from a fund, account, or individual security to an investor or beneficiary. Retirement account distributions are among the most...
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