題組內容

9. Lionel, who has a relatively high income $I$, has an altruistic feeling toward Cristiano, who lives in such poverty that he essentially has no income. Suppose Lionel's preferences are represented by the utility function
$$U_1(c_1, c_2) = c_1^\alpha c_2^{1-\alpha},$$
where $c_1$ and $c_2$ are Lionel and Cristiano's consumption levels, appearing as goods in a standard Cobb-Douglas utility function. Assume that Lionel can spend his income either on his own or Cristiano's consumption (through charitable donations) and that $1 buys a unit of consumption for either (thus, the "prices" of consumption are p1 = p2 = 1).

b. Solve for Lionel's optimal choices under an income tax rate \( t \). How do his choices change if there is a charitable deduction (so income spent on charitable donations, \( c_{2} \), is not taxed)? Does the charitable deduction have a bigger incentive effect on more or less altruistic people? Compare your result to the no-tax case. (12%)