The well-being score for Mario (income $20,000) is 5.6, and the well-being score for Lance (income $150,000) is 9.2. Across the two of them, total well-being is 14.8. The change in well-being for a $5,000 change in income for Mario is .4 and for Lance is .1. What net change in total well-being will occur if $5,000 of Lance's income is taken as tax and transferred to Mario through an income transfer?

Question

Quizplus · Accepted Answer

We need to first calculate the change in well-being for Mario and Lance based on the $5,000 income transfer. For Mario, his income increases by $5,000, so his change in well-being would be:

$5,000 * 0.4 = 2

This means his new well-being score would be 5.6 + 2 = 7.6.

For Lance, his income decreases by $5,000, so his change in well-being would be:

$5,000 * 0.1 = 0.5

This means his new well-being score would be 9.2 - 0.5 = 8.7.

Adding up their new well-being scores, we get:

7.6 + 8.7 = 16.3

This represents a net gain of:

16.3 - 14.8 = 1.5

However, we need to take into account the fact that $5,000 was taken as tax from Lance's income. This means that the net change in well-being is:

1.5 - 5 = -3.5

This means that total well-being falls from 14.8 to:

14.8 - 3.5 = 11.3

To check that our calculations are correct, we can see that Mario's gain of 2 in well-being is offset by Lance's loss of 0.5, making a total gain of 1.5. However, this is then reduced by the $5,000 tax, resulting in a net loss in well-being of 3.5. Therefore, the correct answer is C.

The Well-Being Score for Mario (Income $20,000) Is 5