3. (5 pts each) In the table below, consider four societies with four people of

Question

3. (5 pts each) In the table below, consider four societies with four people of differing incomes: Person Society A Society B Society C Society D Person 11,002 Person 2 Person 3 Person 4 2,200 2 1,001 1,000 800 600 2,050 850 650 450 2,100 800 600 998 a) If you had an equal probability of being one of the persons (ie., 25% chance), which society would you prefer to live in? Why? b) According to Rawl's Maximin principle, which society is worse off? Why? c) Suppose the poverty threshold is $1,000 and below, what are the poverty rates in each society?

Explanation / Answer

a) We find the expected income for all the four societies:

E(I) = p1*i1 + p2*i2 + p3*i3 + p4*i4

E(SocietyA) = 1000, E(SocietyB) = 1150, E(SocietyC)= 1150, E(SocietyD)= 1000.

The expected income is more for Societies B and C and so we would prefer staying there.

b) Rawl's maximin Principle wishes a person to have the best of the worst possible incomes. The society with the least possible minimum income is worse off. It is Society D which is worse off.

c) Poverty rates

Society A : 50%

Society B : 75%

Society C : 50 %

Society D: 75%

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