Consider Bill and Ted, the two citizens in the country of Adventureland described in Problem 9 from Chapter 1.
Suppose that Bill and Ted have the same utility function U(Y) 5 Y1/2, where Y is consumption (which is equal to net income).
a.roblem 9 from Chapter 1 for a utilitarian so Rank the three tax policies discussed in Pcial welfare function. Rank the three for a Rawlsian social welfare function.
b. How would your answer change if the utility function was instead U(Y) 5 Y1/5?
c. Suppose that Bill and Ted instead have different utility functions: Bill's utility is given by UB(Y) 5 1/4Y1/2, and Ted's is given by UT(Y) 5 Y1/2.
(This might happen for example, because Bill has significant disabilities and therefore needs more income to get the same level of utility.)
How would a Rawlsian rank the three tax policies now?
Effects of Redistributive Policies in Adventureland
|
0%
|
25%
|
40%
|
|
Bats ore-tax Income
|
$1000
|
$800
|
$400
|
|
Bars taxes
|
0
|
200
|
160
|
|
Bill's net uncome
|
1000
|
600
|
240
|
|
Ted's pretax uxome
|
120
|
120
|
120
|
|
Ted's transfer payment
|
0
|
200
|
160
|
|
Ted's net Income
|
120
|
320
|
280
|