Question: Consider Meltzer and Richards (1981) model with only two types of income: yp (poor) and yr (rich). Normalize population to 1 with the share

Consider Meltzer and Richards (1981) model with only two types of income:

Consider Meltzer and Richards (1981) model with only two types of income: yp (poor) and yr (rich). Normalize population to 1 with the share of rich being 8 < 0.5. Average income is "y. To focus on inequality and distributional conflict, we add inequality into the model directly: Denote by 8 the share of the total income directed onto the rich, i.e., yr = 0'y 8 (income per rich person) and yp = (1-0) y 1-8 (income per poor person). So an increase in 0 represents an increase in inequality. Also we must have 8 > 8 (so yp

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a The richs bliss point is the income level at which their utility is maximized Assuming the rich have a utility function given by uyr yp yr yp their ... View full answer

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