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    Public Finance

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    Pemuda Impian
    The document describes an economy with two people, Augustus and Livia, and examines how optimal solutions may differ under two social welfare functions: 1) W = UL + UA, which assigns equal importance to their utilities 2) W = UL + 2UA, which assigns twice as much importance to Augustus' utility It finds that under the first function, indifference curves will be straight lines with a slope of -1, while under the second they will have a slope of -2, reflecting the different weights. The optimal solutions under each function are then shown graphically on a utility possibilities curve.

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    Public Finance

    Uploaded by

    Pemuda Impian
    241 views4 pages
    The document describes an economy with two people, Augustus and Livia, and examines how optimal solutions may differ under two social welfare functions: 1) W = UL + UA, which assigns equal importance to their utilities 2) W = UL + 2UA, which assigns twice as much importance to Augustus' utility It finds that under the first function, indifference curves will be straight lines with a slope of -1, while under the second they will have a slope of -2, reflecting the different weights. The optimal solutions under each function are then shown graphically on a utility possibilities curve.

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    The document describes an economy with two people, Augustus and Livia, and examines how optimal solutions may differ under two social welfare functions: 1) W = UL + UA, which assigns equal importance to their utilities 2) W = UL + 2UA, which assigns twice as much importance to Augustus' utility It finds that under the first function, indifference curves will be straight lines with a slope of -1, while under the second they will have a slope of -2, reflecting the different weights. The optimal solutions under each function are then shown graphically on a utility possibilities curve.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    241 views4 pages

    Public Finance

    Uploaded by

    Pemuda Impian
    The document describes an economy with two people, Augustus and Livia, and examines how optimal solutions may differ under two social welfare functions: 1) W = UL + UA, which assigns equal importance to their utilities 2) W = UL + 2UA, which assigns twice as much importance to Augustus' utility It finds that under the first function, indifference curves will be straight lines with a slope of -1, while under the second they will have a slope of -2, reflecting the different weights. The optimal solutions under each function are then shown graphically on a utility possibilities curve.

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    © All Rights Reserved
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    You are on page 1of 4

    6. Imagine a simple economy with only two people: Augustus and Livia.

    a. Let the social welfare function be


    W = UL + UA
    where UL and UA are the utilities of Livia and Augustus, respectively. Graph the social
    indifference curves. How would you describe the relative importance assigned to their
    respective well-being?
    b. Repeat part a when
    W = UL + 2UA
    c. Assume that the utility possibilities curve is as follows:

    Graphically show how the optimal solution differs between the welfare functions given in
    parts a and b.
    Answer
    a) W = UL + UA
    UL : pada sumbu y
    UA : pada sumbu x
    ∂w
    MUL = =1
    ∂U L
    ∂w
    MUA =
    ∂U A
    =1

    MU x 1
    MRS = - =- =-1
    MU y 1
    Karena fungsi kesejahteraan sosial hanya merupakan jumlah utilitas individu Augustus
    dan Livia, maka indifference curve akan menjadi garis lurus dengan kemiringan -1,
    seperti grafik dibawah ini:
    b) W = UL + 2 UA
    UL : pada sumbu y
    UA : pada sumbu x
    ∂w
    MUL = =1
    ∂U L
    ∂w
    MUA =
    ∂U A
    =2

    MU x 2
    MRS = - =- =-2
    MU y 1
    Indifference curve sosial menunjukkan kombinasi utilitas Livia dan Augustus yang
    menghasilkan kesejahteraan sosial yang sama, setiap indifference curve sosial memiliki
    kemiringan – 2, seperti grafik dibawah ini:
    c) Berikut merupakan grafik solusi optimalnya:

    10. [This problem is for readers who know some calculus.] Suppose that there are only two
    people in society, Mark and Judy, who must split a fixed amount of income of $300. Mark's
    utility function is UM and his income is IM. Judy's utility function is UJ and her income is IJ.
    Suppose that
    UM = 100 x I 1/M 2 and UL = 200 x I 1/J 2
    Let the social welfare function be
    W= UM + UJ
    What distribution of the total income between Mark and Judy maximizes social welfare?
    Answer
    IM = Pendapatan Mark
    IJ = Pendapatan Judy
    Pendapatan tetap $300
    UM = 100 IM1/2
    UJ = 200 IJ1/2
    IM + IJ = 300
    IM = 300 – IJ
    IJ = 300 – IM
    W = UM + UJ
    = 100 IM1/2 + 200 IJ1/2
    = 100 IM1/2 + 200 (300 - IM)1/2
    Sehingga:

    [ () ][ () ]
    1 1
    ∂W 1 2 −1 1 −1

    ∂IM
    = 100
    2
    I M + 200
    2
    ( 300−I M )❑2 (−1) = 0

    −1
    ¿>50 I −1
    M
    /2
    – 100 ( 300−I M )❑2 = 0
    −1
    −1 /2
    ¿>50 I M =100 ( 300−I M )❑2
    1 100
    ¿> 1
    = −1 /2
    2 50(300−I M )
    I M

    ( ) ( )
    2 2
    1 2
    ¿> 1 /2
    = 1 /2
    IM (300−I M )
    I 4
    ¿> =
    I M 300−I M
    ¿>300−I M =4 I M
    ¿> 4 I M + I M =300
    ¿>5 I M =300
    300
    ¿> I M = =60
    5
    I M =60
    ¿> I J =300−I M
    ¿ 300−60 = 240
    I J =240
    Oleh karena itu, alokasi pendapatan optimal adalah 60 untuk Mark dan 240 untuk
    Judy yang memaksimalkan fungsi kesejahteraan sosial W = UM + UJ

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