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Consider the income redistribution example studied in class, i.e., Ui(ci) = 2(ci)^(1/2)with ci = Yi - ti. For simplicity assume that Y1 = 99 and Y2 = 1. More important assume that when a dollar is transferred from individual 1 to individual 2, a fraction L of it, where 0=0. Calculate the socially optimal level of income transfer, if any, from individual 1 to individual 2 that would maximize (i) SWU, SWR, and SWM/N.

Consider the income redistribution example studied in class, i.e., Ui(ci) = 2(ci)^(1/2)with ci = Yi - ti. For simplicity assume that Y1 = 99 and Y2 = 1. More important assume that when a dollar is transferred from individual 1 to individual 2, a fraction L of it, where 0=0. Calculate the socially optimal level of income transfer, if any, from individual 1 to individual 2 that would maximize (i) SWU, SWR, and SWM/N.

Exploring Economics
Exploring Economics
8th Edition
ISBN:9781544336329
Author:Robert L. Sexton
Publisher:Robert L. Sexton
Chapter17: Income, Poverty, And Health Care
Section: Chapter Questions
Problem 4P
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Consider the income redistribution example studied in class, i.e., Ui(ci) = 2(ci)^(1/2)with ci = Yi - ti. For simplicity assume that Y1 = 99 and Y2 = 1. More important assume that when a dollar is transferred from individual 1 to individual 2, a fraction L of it, where 0=0. Calculate the socially optimal level of income transfer, if any, from individual 1 to individual 2 that would maximize (i) SWU, SWR, and SWM/N.
Transcribed Image Text:Consider the income redistribution example studied in class, i.e., Ui(ci) = 2(ci)^(1/2)with ci = Yi - ti. For simplicity assume that Y1 = 99 and Y2 = 1. More important assume that when a dollar is transferred from individual 1 to individual 2, a fraction L of it, where 0=0. Calculate the socially optimal level of income transfer, if any, from individual 1 to individual 2 that would maximize (i) SWU, SWR, and SWM/N.
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