Jack and Kate both care about the poor. A €10 reduction in poverty generates benefits of...

Jack and Kate both care about the poor. A €10 reduction in poverty generates benefits of €7.50 for both Jack and Kate. Assume that Jack and Kate can make a charity donation of a maximum of €10 each if they so wish.

(i) Using a pay-off matrix outline and explain the four possible pay-offs.

(ii) Assuming both Jack and Kate have an incentive to free-ride on the giving of others how much will each of them contribute to poverty alleviation? Explain, using your pay-off matrix. (iii) (ii)Using your pay-off matrix explain how compelling both Jack and Kate to give €10 each through an income tax system could benefit both of them and lead to a Pareto improvement.

Expert Solution

Rahul Sunny answered 6 months ago

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