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Respective marginal utilities of the two people

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Consider an economy with two people in it, labeled y and o and a government that can take taxes T from person y and give the money to person o. If taxes are zero, person y has income ny and person o has income no. Suppose the respective marginal utilities of the two people are

μy = a - (ny - T) (1)

μo = b - (no + T) (2)

Solve for the socially optimal level of T and explain your formula in intuitive terms. In particular, discuss how T changes if b goes up, and why. Explain why an increase in b could plausibly be interpreted as the effect of the invention of a new, effective, but expensive drug that cures person o of some health problem.

Reference no: EM132181340

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