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

a. Redistribute income from Victoria to Fredrick.

Step-by-step solution

Understand Marginal Utility

Marginal utility is the additional satisfaction or utility that a person receives from consuming an additional unit of a good or service. In this scenario, Victoria gains 10 utils for her last dollar of income, while Fredrick gains 15 utils for his last dollar of income.

Identify Current Inefficiency

Since Fredrick derives more utility (15 utils) than Victoria (10 utils) from the last dollar, there is an inefficiency. To maximize total utility, you would want the marginal utility of the last dollar spent by both individuals to be equal.

Determine Redistribution Direction

To equalize the marginal utility per dollar, redistribution should occur from the person with the lower marginal utility (Victoria: 10 utils) to the person with the higher marginal utility (Fredrick: 15 utils). This way, each dollar leads to the greatest increase in total utility.

Conclusion on Redistribution

By moving income from Victoria (who gains less utility per dollar) to Fredrick (who gains more utility per dollar), the combined total utility of Victoria and Fredrick is maximized. Therefore, income should be redistributed from Victoria to Fredrick.

Key concepts

Income Redistribution

Income redistribution is a policy intended to adjust the allocation of income within a society. The goal is to achieve a more equitable distribution of wealth and resources. When discussing income redistribution, one important consideration is marginal utility. When the marginal utility of income differs between individuals, it signals a potential inefficiency. In such cases, redistributing income from a person with lower marginal utility to a person with higher marginal utility can increase the overall utility.

• Marginal utility refers to the additional satisfaction received from an additional unit of income.
• Higher marginal utility indicates that income has a greater impact on satisfaction for that person.
• Redistribution aims to equalize marginal utilities, optimizing the satisfaction per dollar and maximizing societal welfare.

In our scenario, Fredrick gains more utility per dollar than Victoria, suggesting that transferring income from Victoria to Fredrick would increase total utility. Thus, income redistribution can be a tool for enhancing economic efficiency and maximizing social welfare.

Total Utility Maximization

Total utility maximization is the process of adjusting the allocation of resources to achieve the greatest overall satisfaction. In economics, this concept helps determine how best to distribute resources among individuals to maximize collective utility. To maximize total utility, one should consider the marginal utility of income for each individual. If the marginal utility differs, income should be redirected towards the person receiving more utility per unit, until balance is achieved.

• Total utility is the aggregate satisfaction gained by all individuals within an economy.
• Balancing marginal utility among people ensures that each unit of income provides the highest possible total satisfaction.
• When marginal utilities are equaled, any further income transfers will not increase total utility.

In the example given, Fredrick's marginal utility for the last dollar is higher than Victoria's. To achieve total utility maximization, redistributing some income from Victoria to Fredrick is necessary, thereby increasing the overall satisfaction of both parties.

Economic Efficiency

Economic efficiency occurs when resources are allocated in a way that maximizes total utility or welfare. This concept is crucial for understanding how well resources can be used to satisfy the wants and needs of an economy. Efficiency in economics means not only maximizing utility but also minimizing waste and ensuring that every dollar spent contributes optimally to overall satisfaction.

• Economic efficiency maximizes satisfaction by optimizing resource allocation.
• The goal is to balance marginal utilities to remove any disparities.
• Achieving economic efficiency means that any reallocation would not result in further benefits.

In the problem scenario, to enhance economic efficiency, resources (income) should be moved from Victoria, whose marginal utility is lower, to Fredrick, whose marginal utility is higher. This transfer ensures each dollar generates the most satisfaction possible, thereby improving the overall efficiency of the economy.