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The country of Adventureland has two citizens, Bill and Ted. Bill has a private legal business. He earns $50 per hour. At a tax rate of 0%, Bill works 20 hours per week. At a 25% tax rate he works

The country of Adventureland has two citizens, Bill and Ted. Bill has a private legal business. He earns $50 per hour. At a tax rate of 0%, Bill works 20 hours per week. At a 25% tax rate he works only 16 hours per week, and at a 40% tax rate he works only 8 hours per week. Ted works a manufacturing job. He works 20 hours per week and earns $6 per hour, regardless of the tax rate. The government is considering imposing an income tax of either 25% or 40% on Bill and using the revenues to make transfer payments to Ted. The accompanying table summarizes the three possible policies. Effects of Redistributive Policies in Adventureland Bill's pre-tax income Bill's taxes Bill's net income Ted's pre-tax income Ted's transfer payment Ted's net income 0% $1.000 0 $1,000 S120 0 $120 25% 8800 $200 S600 S120 $200 $320 40% $400 $160 S240 $120 S160 S280 a. Compare the three policies. Are any of the policies obviously less than optimal? Now suppose that Bill and Ted have the same utility function U(Y) = 12, where Yis consumption (which is equal to net income). b. Rank the three tax policies discussed in part (a) for a Rawlsian social welfare function. Rank the three for a utilitarian social welfare function. c. How would your answer change if the utility function was instead UIY) = y115? d. Suppose that Bill and Ted instead have different utility functions: Bill's utility is given by UR(Y) = 7712, and Ted's is given by U"() = y12 (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?

Apr 12 2021 View more View Less

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