PART A

Answer THREE questions from the six in this section

MICROECONOMICS
1.
Individuals A and B obtain utility from consumption and leisure. They currently work,
consume positive amounts and can freely choose their hours of work. They each face
the same wage rate but have different utility functions. A regards leisure and
consumption as perfect complements. B has a well-behaved quasi-linear utility
function, which implies that there is no income effect in her demand for leisure.
(i)

(ii)
(iii)

A and B experience an increase in their non-wage income. What will be the

effect on their consumption and on their hours of work? Will they both
continue to participate in the labour market? [30%]
What will be the effect on the hours of work of A and B of an increase in the
hourly wage? Comment on your answer. [40%]
B currently pays taxes in proportion to her income. The tax system now
changes to one in which individuals pay lump-sum taxes, with each individual .
paying the same amount of tax as before. Show that B will be better off, and
will supply more labour, with the lump-sum tax than with the income tax.
[30%]

CPPE 4265
CEAM4265
CMHE4265
DEEA4265
XMMA4265
DMMA4265
2

Microeconomics Collection Paper (Year One)

Answer four questions, three from part A and one from part B.
Start each answer on a separate piece of paper.
Time: Three hours.

Part A
[1] Consider the following scheme devised by the parents of an overweight child in order to
reduce the childs consumption of chocolate bars. The parents oer to sell chocolate bars to
the child at the market price of $1 plus a parental tax of 50 cents per bar. To induce the child
to co-operate the parents oer to increase the childs allowance by $X. If the child accepts the
deal (s)he agrees not to buy chocolate bars from anyone else.
(i) Draw a diagram in which you identify the minimum value of X, X, that would induce
the child to co-operate.
(ii) Assuming that the parents do increase the childs allowance by X, will the childs
consumption of chocolate bars decrease?
(iii) Will the amount of tax the parents collect from the child be as large as the increase in
the childs allowance?