Question
Consider an economy with two individuals, A and B, with quasi-linear preferences over a private good x i with i = A,B, and over a
Consider an economy with two individuals, A and B, with quasi-linear preferences over a private good xi with i = A,B, and over a public good, G, represented by the utility function U(xi, G) = xi + lnG. Each of them has income mi with i = A, B that can be spent on the private good xi or contributed to the public good, G. Each individual's contribution is gi. One unit of individual contribution is used to produce one unit of the public good, G . The social planner has a Rawlsian social welfare function given by: W(UA,UB) = min{5UA, 5UB}. a) Write the budget constraint for each individual, A and B. b) Derive the Lagrangean corresponding to the optimization problem of individual B. c) Calculate the first order conditions. d) Derive the best response function for individual B, gB. e) Calculate the demand functions for xi (the private good) and G (the public good)
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