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If total real GDP remains constant but income shifts from the poor to the rich, what may happen to social welfare?

Answer and explanation

Correct answer: Social welfare may fall

The governing concept is the distributional limitation of GDP. Real GDP can remain unchanged because total production is unchanged, yet welfare need not remain unchanged. Under diminishing marginal utility of income, transferring income away from poorer households can cause a larger utility loss than the gain enjoyed by richer households. Hence option B is the appropriate cautious conclusion. Options A and D ignore distribution, while C contradicts the stated constant GDP.

Related tags

Income DistributionMarginal UtilitySocial WelfareReal GdpGdp And WelfareNational Income And Related AggregatesEconomicsClass 11 Mcq

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