Chapter 1

No.9

(a)
Real change
1997–2001 Absolute change Real change
(per capita)

Tax on production and imports 25,289 18,283 283.3

Current taxes on income, wealth, etc. 44,927 36,763 591.4

Capital taxes 795 690 11.2

Social Security contributions 15,082 11,476 180.6

Total 86,093 67,211 1065.9

Real change
2007–2011 Absolute change Real change
(per capita)

Tax on production and imports 25,898 8,716 50.9

Current taxes on income, wealth, etc. 5,667 -17,048 -388.2

Capital taxes -961 -1340 -23.3

Social Security contributions 10,343 -202 -57.3

Total 40,947 -9,874 -417.9

(b)
Real change
1997–2001 Absolute change Real change
(per capita)

Tax on production and imports 23.66% 16.06% 14.49%

Current taxes on income, wealth, etc. 36.08% 27.70% 25.98%

Capital taxes 49.66% 40.45% 38.55%

Social Security contributions 27.42% 19.58% 17.96%

Total 29.89% 21.90% 20.25%

Real change
2007–2011 Absolute change Real change
(per capita)

Tax on production and imports 14.76% 4.52% 1.61%

Current taxes on income, wealth, etc. 2.44% -6.69% -9.30%

Capital taxes -24.85% -31.55% -33.46%

Social Security contributions 9.60% -0.17% -2.95%

Total 7.89% -1.73% -4.47%

Capital taxes had the largest relative increase from 1997 to 2001 and taxes on
production and imports had the largest increase from 2007 to 2011. The largest
decrease happened on capital taxes from 2007 to 2011.
Chapter 3

No.6

(a)
Social indifference curves are straight lines with slope of (–1). As far as society is
concerned, the “utility” to Augustus is equivalent to the “utility” to Livia.

(b)
Social indifference curves are straight lines with slope of (–2). This reflects the fact
that society values a “utility” to Augustus twice as much as a “utility” to Livia.
(c)
Parts (a) Parts (b)

No.9

0 p 100

In this case, the “Edgeworth box” is actually a line because there is only one good on
the island. The set of possible allocations is a straight line, 100 units long. Every
allocation is Pareto efficient, because the only way to make one person better off is to
make another person worse off. There is no theory in the text to help us decide
whether an allocation is fair. Although splitting the peanuts even between the people
may be fair, it may not be fair if the calorie “needs” of the people are different. With a
social welfare function, we can make assessments on whether redistribution for
society as a whole is a good thing.

No.10

Social welfare is maximized when Mark’s marginal utility of income is equal to

Judy’s marginal utility of income. Taking the derivative of Mark’s utility function to
find his marginal utility function yields MUM = 50/(IM1/2) and taking the derivative of
Judy’s utility function yields MUJ = 100/(IJ1/2). If we set MUM equal to MUJ, the
condition for maximization becomes IJ = 4IM and, since the fixed amount of income is
$300, this means that Mark should have $60 and Judy should have $240 if the goal is
to maximize social welfare = UM + UJ.
No.11

(a)

If the food is evenly distributed between Tang and Wilson, Tang will have 14.14 units
of utility and Wilson will have 7.07 units of utility.

(b)

If the social welfare function is W  U T  UW , then the marginal utilities of both

1 1
should be equal to maximize social welfare. Equate MU T  FT 2 to
2
1 1
MU W  Fw 2 and substitute FT  400  Fw . Therefore, FT  320 and FW  80 .
4

(c)

If the utility of both Tang and Wilson must be equal, then set U T  U W and

substitute FT  400  Fw and solve. Therefore, FT  80 and FW  320 .

No.13

(a)

The marginal rates of substitution for coffee and for tea are constant for both Hannah
and Jose. Hannah would trade 1/4 pound of coffee for 1/3 pound of tea to remain
equally satisfied. Similarly, Jose would trade 1/4 pound of tea for 1/3 pound of coffee
to remain equally satisfied. The constant MRS means linear indifference curves.

(b)

Green indifference curves are Jose’s and red indifference curves are Hannah’s.
(c)

The contract curve follows the bottom and right borders of the Edgeworth Box. At
any interior point in the box, the parties will find it in their interest to trade until they
reach these borders. This is because Hannah would only choose to consume tea once
she has consumed all the coffee in the economy. Likewise, Jose would only choose to
consume coffee once he has consumed all the tea in the economy.

(d)

The initial allocation is not Pareto efficient. It is possible to make one better off
without making the other worse off.

No.14

(a)

False. If MRS Axy  MRS Bxy but MRS Axy  MRS Bxy  MRTxy , then it is not Pareto

efficient.

(b)
Uncertain. As long as the allocation is an interior solution in the Edgeworth box, the
marginal rates of substitution must be equal across individuals. This need not be true,
however, at the corners where one consumer has all the goods in the economy.

(c)

False. A policy that leads to a Pareto improvement results in greater efficiency, but
social welfare depends on equity as well as efficiency. A policy that improves
efficiency but creates a loss in equity might reduce social welfare.

C D
A

For example, from A to B, it increases social welfare, but it’s not a Pareto
improvement since it hurts other’s utility while increasing one’s utility. On the other
hand, from C to D, it’s a Pareto improvement, but the social welfare level does not
change.

(d)

False. Moving to a point on the utility possibilities curve may not result in a Pareto
improvement because one party may receive less utility on the curve than they
received at the interior point. For example, from E to F, the allocation moves from the
interior point of the utility possibilities curve to the point on the utility possibilities
curve, but it’s not a Pareto improvement.