Suppose there are only two people, Mr. Mullinax and Ms. Fleming, who must split a fixed...

Suppose there are only two people, Mr. Mullinax and Ms. Fleming, who must split a fixed income of $50,000. For Mr. Mullinax, the marginal utility of income falls and for Ms. Fleming, marginal utility of income also falls. The utility functions are identical. I(m) and I(f) are the initial amounts of income to Mr. Mullinax and Ms. Fleming, respectively.

a) What is the optimal distribution of income if the social welfare function is additive? Why?

b) What is the optimal distribution if society values only the utility of Ms. Fleming? What if the reverse is true? Comment on your answer.

c) Finally, comment on how your answers change if the marginal utility of income for both Mr. Mullinax and Ms. Fleming is a constant level.

Expert Solution

Rahul Sunny answered 1 year ago

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Suppose there are only two people, Mr. Mullinax and Ms. Fleming, who must split a fixed...

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