Why may social welfare fall if real GDP remains constant but income shifts from low-income to high-income groups?
Answer and explanation
Correct answer: Because marginal utility of income may be higher for low-income groups
Real GDP measures the volume of aggregate production, not how that production income is distributed. Under the diminishing marginal utility of income, an additional rupee generally gives greater satisfaction to a low-income household than to a rich household. If income shifts toward the rich while total output stays fixed, the loss of utility among poorer people may exceed the gain among richer people. Thus B is correct; A, C and D contradict the situation.
Frequently asked questions
What is the correct answer to this question?
Because marginal utility of income may be higher for low-income groups
Why is this the correct answer?
Real GDP measures the volume of aggregate production, not how that production income is distributed. Under the diminishing marginal utility of income, an additional rupee generally gives greater satisfaction to a low-income household than to a rich household. If income shifts toward the rich while total output stays fixed, the loss of utility among poorer people may exceed the gain among richer people. Thus B is correct; A, C and D contradict the situation.
Which subject and chapter does this question cover?
This is a Class 11 Economics question. Chapter: National Income and Related Aggregates. Topic: GDP and Welfare.
