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Author Question: How is the principle of diminishing marginal utility used to justify income ... (Read 94 times)

jon_i

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on: Jun 30, 2018
How is the principle of diminishing marginal utility used to justify income redistribution?

Question 2

If the market price of an option just before its expiration is 33 while its strike price is 29, arbitrage will determine a price for it that:
 a. leaves an investor indifferent between buying the stock outright or buying an option and then exercising it.
  b. encourages the investor to buy the stock outright and sell it when the option expires.
  c. encourages the investor to buy an option and exercise it only after its expiration.
  d. encourages the investor to buy the stock outright and rewrite an option later.


diesoon

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Reply #1 on: Jun 30, 2018
Answer to Question 1

The argument proposes that as income rises, the happiness associated with that income also rises, but by diminishing amounts. The decrease in utility that results from taking income from high-income groups may be less than the increase in utility generated by giving this income to low-income groups. The total utility in society would be enhanced by such redistribution if people have similar preferences for income. The exact utility income relationship is impossible to state, however, because of our inability to measure utility precisely or to make utility comparisons across individuals.

Answer to Question 2

A


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