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Public Finance

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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338 views4 pages

Public Finance

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.

Uploaded by

Pemuda Impian
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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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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