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The economic theory mode of solving problems and investigating the implications for
social welfare is to work out the planning solution first. That is to say, imagine that the
purity of the exercise is not contaminated by the noise of the market and the problem of
answering the question: where does the money come from? What if the reader was a
benevolent despot and cared about the welfare of all her people? The economy has 100
teachers. It can assign them to primary schools, x, or higher educational institutions, y. x2
teachers are needed to run x schools and y2 faculty are needed at y institutes. The
economys labour constraint is
x2 + y2 = 100
The planners preferences are represented by
U(x,y) = ax + by
where a, b, are given positive constants.
In order to solve the problem we set up the Lagrangian
L(x,y,) = ax + by + (100 - x2 y2)
The first-order conditions are (Recall the rules In each case look for the variable that is
bring perturbed on the right-hand side, keeping the rest in cold storage.)
L/x = a - 2x = 0
L/y = b - 2y = 0
L/ = 100 - x2 y2 = 0
Plugging in the first two equations into the third,
100 = ( a2 + b2)1/2/42
Simplifying,
= ( a2 + b2)1/2/20
and
x = 10a/( a2 + b2)1/2, y = 10b/( a2 + b2)1/2
We have supply functions for primary and higher education. It is convenient to regard a,
b, as the weights that society or the planner attaches to primary education and higher
education respectively. It can be seen that only the relative weights matter. If they are
increased in equal proportion x and y do not change. The supply of primary education can
only increase with a planner with a higher a relative to b in her utility function.