In: Economics
Find nash equilibrium for t and y
utitily functions for rich (r) and poor (p)
y is income and t is tax.
ur = y(1 − t) − 0.5y 2
up(t, y) = ty
We have the utility function of rich and poor as follows:
The utility function of rich is
The utility of poor is
Here, the two players are rich (r) and poor (p), where t = tax and y = income.
Considering the utility function of rich,
if 'r' chooses (t) then we have to differentiate the utility function of rich with respect to (t), hence we get the following
if 'r' chooses (y) then we have to differentiate the utility function of rich with respect to (y), hence we get the following
The Nash Equilibria occurs at the best response of (t) and (y) at (t*,y*), hence we have the Nash equilibrium of rich as follows
Considering the utility function of poor,
if 'r' chooses (t) then we have to differentiate the utility function of poor with respect to (t), hence we get the following
if 'r' chooses (y) then we have to differentiate the utility function of rich with respect to (y), hence we get the following
The Nash Equilibria occurs at the best response of (t) and (y) at (,), hence we have the Nash equilibrium of poor as follows
Conclusion:
The Nash Equilibrium of rich
The Nash Equilibrium of poor