Course : Public Economics

Lecturer : Dermendzhieva Zvezda

Student name : Anak Agung Rai Surya Agung
ID : MEL 10605

Given :
A society consists of 2 people, Mark (M) and Judy (J), with a total income of $300 and
utility functions as follows
𝑈𝑀 = 100𝐼𝑀 0.5
𝑈𝐽 = 200𝐼𝐽 0.5
The social welfare function and the budget constraint will be
𝑊 = 𝑈𝑀 + 𝑈𝐽
𝐼𝑀 + 𝐼𝐽 = 300

Social welfare maximization

maxL = 𝑚𝑎𝑥 {100𝐼𝑀 0.5 + 200𝐼𝐽 0.5 + 𝜆(300 − 𝐼𝑀 − 𝐼𝐽 }
L
= 50𝐼𝑀 −0.5 − 𝜆 = 0
I M
 𝜆 = 50 𝐼𝑀 −0.5……………………………………..……….(1)
L
= 100 𝐼𝐽 −0.5 − 𝜆 = 0
I J
 𝜆 = 100 𝐼𝐽 −0.5………………...………………………..….(2)
L
= 300 − 𝐼𝑀 − 𝐼𝐽 = 0

 𝐼𝑀 + 𝐼𝐽 = 300 ………………………………………………(3)

Solution for IMand IJ from (1) and (2)

50 𝐼𝑀 −0.5 = 100 𝐼𝐽 −0.5
100
 𝐼𝑀 −0.5 𝐼𝐽 0.5 =
50
𝐼𝐽 0.5
 (𝐼 ) =2
𝑀
𝐼𝐽
 =4
𝐼𝑀
 IJ = 4 IM …………………………………………...……….(4)

Substitution (4) to (3) yields

𝐼𝑀 + 4 𝐼𝑀 = 300
 5 IM = 300
 IM = 60 ………………………………………...…………..(5)

Substitution (5) to (4) yields

IJ = 4 × 60
 IJ = 240 ……………………………………...…………….(6)
The maximum social welfare is
W = UM+ UJ
= (100 𝐼𝑀 0.5 ) + (200 𝐼𝐽 0.5 )
= (100 × 600.5 ) + (200 × 2400.5 )
= 3872.98

Thus, the distribution of the total income between Mark and Judy that maximize the
social welfare is Mark $60 and Judy $240. With this distribution, the social welfare will
be 3872.98.

IM IJ UM UJ W
40 260 632.46 3224.90 3857.36
41 259 640.31 3218.70 3859.01
42 258 648.07 3212.48 3860.55
43 257 655.74 3206.24 3861.99
44 256 663.32 3200.00 3863.32
45 255 670.82 3193.74 3864.56
46 254 678.23 3187.48 3865.71
47 253 685.57 3181.19 3866.76
48 252 692.82 3174.90 3867.72
49 251 700.00 3168.60 3868.60
50 250 707.11 3162.28 3869.38
51 249 714.14 3155.95 3870.09
52 248 721.11 3149.60 3870.71
53 247 728.01 3143.25 3871.26
54 246 734.85 3136.88 3871.72
55 245 741.62 3130.50 3872.12
56 244 748.33 3124.10 3872.43
57 243 754.98 3117.69 3872.67
58 242 761.58 3111.27 3872.85
59 241 768.11 3104.83 3872.95
60 240 774.60 3098.39 3872.98
61 239 781.02 3091.92 3872.95
62 238 787.40 3085.45 3872.85
63 237 793.73 3078.96 3872.69
64 236 800.00 3072.46 3872.46
65 235 806.23 3065.94 3872.17
66 234 812.40 3059.41 3871.82
67 233 818.54 3052.87 3871.40
68 232 824.62 3046.31 3870.93
69 231 830.66 3039.74 3870.40
70 230 836.66 3033.15 3869.81
71 229 842.61 3026.55 3869.16
 72 228 848.53 3019.93 3868.46
73 227 854.40 3013.30 3867.70
74 226 860.23 3006.66 3866.89
75 225 866.03 3000.00 3866.03
76 224 871.78 2993.33 3865.11
77 223 877.50 2986.64 3864.13
78 222 883.18 2979.93 3863.11
79 221 888.82 2973.21 3862.03
80 220 894.43 2966.48 3860.91
81 219 900.00 2959.73 3859.73
82 218 905.54 2952.96 3858.50
83 217 911.04 2946.18 3857.23

Social Welfare
3874
3872
3870
3868
W 3866
3864
3862
3860
3858
3856
30 40 50 60 70 80 90

IM

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