Question

Suppose that the last dollar that Victoria receives as income brings her a marginal utility of 10 utils while the last dollar that Fredrick receives as income brings him a marginal utility of 15 utils. If our goal is to maximize the combined total utility of Victoria and Fredrick, we should: a. Redistribute income from Victoria to Fredrick. b. Redistribute income from Fredrick to Victoria. c. Not engage in any redistribution because the current situation already maximizes total utility. d. None of the above.

Short answer

Redistribute income from Victoria to Fredrick (option a).

Step-by-step solution

Understanding Marginal Utility

Marginal utility is the additional satisfaction or utility gained from consuming an additional unit of a good or service. In this problem, we examine the marginal utility derived from the last dollar received by Victoria and Fredrick. Victoria receives 10 utils from her last dollar, while Fredrick receives 15 utils from his last dollar.

Analyzing Combined Total Utility

To maximize the total utility, we aim to equalize the marginal utility per dollar for both individuals. Currently, Fredrick gains more utility (15 utils) from an extra dollar than Victoria (10 utils). This indicates redistribution could improve total utility.

Deciding on Redistribution

Since Fredrick gains more utility from an extra dollar than Victoria, we should redistribute income from Victoria to Fredrick. This would increase the total utility because each dollar moved to Fredrick is valued more by him.

Key concepts

Income Redistribution

Income redistribution refers to adjusting the distribution of income across various individuals or groups to achieve a certain goal, such as maximizing total utility. When considering the marginal utility of money, it helps to identify who benefits more from each additional dollar. In Victoria's and Fredrick's case, Fredrick derives more utility from each extra dollar (15 utils) compared to Victoria (10 utils).
This situation suggests that shifting some income from Victoria to Fredrick can increase the overall utility. When resources are limited, redistribution aims to enhance the well-being of those who stand to benefit more, resulting in a more efficient outcome for the group as a whole. This is because Fredrick derives greater satisfaction from each additional dollar beyond what Victoria does.
Practical income redistribution strategies can include:

• Taxation policies that are progressive, meaning higher earners pay a larger percentage.
• Government welfare programs targeted towards individuals with lower marginal utilities.

Such strategies ensure that income shifts towards individuals who can maximize the use of each additional dollar, thereby increasing the total welfare.

Combined Total Utility

Combined total utility is the sum of satisfaction or happiness of all individuals in a group from consuming goods or services. The goal is to get the most overall well-being for a group, rather than focusing on just one individual's satisfaction.
In the example of Victoria and Fredrick, the combined total utility is determined by how effectively each individual uses each dollar they receive. Fredrick gains more from each additional dollar, indicating that moving more dollars to him can raise the whole group's utility. The total utility is not simply about adding up individual utilities; it's about optimizing the distribution where each unit of currency creates the most satisfaction.

• Maximizing combined total utility ensures the group as a whole benefits the most from any distribution of resources.
• It examines who can derive more value from a smaller amount of resources, ensuring resources are not wasted.

Ultimately, it's about achieving the highest possible group satisfaction through strategic resource allocation.

Utility Maximization

Utility maximization is the process of adjusting the allocation of resources to achieve the highest possible total utility. It involves strategic decisions to ensure that each unit of currency or resource moves to where it is most valued.
In scenarios like Victoria and Fredrick's, utility maximization requires examining who gains more satisfaction per dollar received. By directing money towards Fredrick, who draws higher utility from every additional dollar, we enhance the overall wellness of the group.
This concept can be described further as:

• Ensuring that marginal utility per dollar is the same across all individuals for optimal distribution.
• Focusing on moving resources where they create the most satisfaction, rather than equally distributing resources.

In practice, utility maximization means identifying individuals with higher marginal utilities and redistributing resources to them, thereby efficiently achieving the best outcome for everyone involved.