Suppose the US has two income classes: a lower and an upper class. Households who are lower class make $50,000 per year. Households who are upper class make $150,000 per year. The shares of the US households who are lower and upper class are 0.9 and 0.1, respectively. President Trump comes out with a plan to tax the lower class and provide the increased revenue to the upper class. Specifically, his economic advisors have told him that if he taxes each lower class household $2,000/year, he can boost the incomes of each of the upper class households by $15,000 per year.

1. What is the average household income in the US before the tax? Type your answer in arabic numbers (without any comma or decimal points).

2. What is the average household income after the tax?

3. Assume that the social welfare function for the US is SWF = [sq (C low)] + [sq (C high)] where (C low) is total consumption level of low income household, and (C high) is total consumption level of high income household.

   What is the social welfare for the US before the tax? What about after the tax?

   Before:

   After:

4. Draw a set of typical looking social indifference curves and a welfare possibilities frontier representing the above situation. The X-axis should be household income for the upper class. The Y-axis should be household income for the lower class.

   Illustrate two points on the diagram

   1) before the tax (assume this point is pareto efficient),

   and 2) after the tax. Make sure to draw an indifference curve through each point. Explain and justify your drawing

5. What could be an example of a social welfare function (an equation) that President Trump thinks the US has, i.e., that would yield a higher social welfare after the tax than before the tax? Re-draw your diagram from (d) with President Trumps social welfare curves and explain and justify your diagram.