2. Suppose there are only two people, Simon and Charity, who must split a fixed income of $100. For Simon, the marginal utility of income is MU, = 400 - 21, whereas for Charity, marginal utility is MU= 400 - 61 where I, I, are the amounts of income to Charity and Simon, respectively. a. What is the optimal distribution of income if the social welfare function is additive? b. What is the optimal distribution if society val- ues only the utility of Charity? What if the reverse is true? Comment on your answers. c. Finally, comment on how your answers change if the marginal utility of income for both Simon and Charity is constant: MU= 400 MU, 400

2. Suppose there are only two people, Simon and Charity, who must split a fixed income of $100. For Simon, the marginal utility of income is MU, = 400 - 21, whereas for Charity, marginal utility is MU= 400 - 61 where I, I, are the amounts of income to Charity and Simon, respectively. a. What is the optimal distribution of income if the social welfare function is additive? b. What is the optimal distribution if society val- ues only the utility of Charity? What if the reverse is true? Comment on your answers. c. Finally, comment on how your answers change if the marginal utility of income for both Simon and Charity is constant: MU= 400 MU, 400

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter9: The Basic Tools Of Finance

Section: Chapter Questions

Problem 5PA

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