Question

Question 1:   

1. If the Canadian government redistributes income from the rich to the poor, explain how this action affects equity as well as efficiency in the economy.

2. You are selling your 1996 Mustang. You have already spent $1000 on repairs. At the last minute, the transmission dies. You can pay $600 to have it repaired, or sell the car “as is.” In each of the following scenarios, should you have the transmission repaired? Explain.

1. Blue book value is $6500 if transmission works, $5700 if it doesn’t

2. Blue book value is $6000 if transmission works, $5500 if it doesn’t

Answer 1

a) If Canadian government redistributes income from rich to the poor, it will achieve equity as overall income gap will fall in the economy while it will lower efficiency as it will reduce incentive for rich people to work and lower the overall growth of income.

b) Transmission cost = $600

i) If the car value is $6,500 if transmission works and $5,700 if it does not work. It means new transmission raise your car value by $800 and transmission cost $600 result in overall benefit of $200. Thus you should get it repaired.

ii) If the car value is $6,000 if transmission works and $5,500 if it does not work. It means new transmission raise your car value by $500 and transmission cost $600 result in overall loss of $100. Thus you should not get it repaired.