Question

Use the following information to answer the next two questions:

Suppose society consists of two individuals, A and B, who must split a fixed income of $100. Individual A’s marginal utility of income is given by MU_A=400-8I_A and individual B’s marginal utility of income is given by MU_B=800-4I_B.

17. If the social welfare function is given by W=U_A+U_B, then at the optimal distribution of           income, social welfare (W) is _______________.

18. Suppose instead that the social welfare function is given by W=U_A, then at the optimal distribution of income, social welfare (W) is ______________.

Use the following information to answer the next three questions:

Consider an altruistic individual whose utility function is given by U=f(I_self,I_charity). Their marginal benefit of donating to charity (i.e. those in need) is given by MPB=200-I_charity and their marginal cost of donating to charity is given by MPC=4I_charity. This individual’s donations also result in marginal external benefits to third parties (those who benefit from knowing that donations are being made to those in need), given by MEC=5. Using a graph with dollars on the vertical axis and I_charity on the horizontal axis, answer the following questions.

19. This individual will voluntarily donate $ ______________to charity.

20. The deadweight loss associated with this individual voluntarily donating to charity is

      $_____________.

21. To encourage this individual to voluntarily donate the socially efficient amount to charity government would need to offer this individual a tax credit in the amount of $_____________.

Answer 1