1. 2. (a) State the Axiom of Monotonicity and explain what its main consequences are. [25...
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1. 2. (a) State the Axiom of Monotonicity and explain what its main consequences are. [25 Marks] (b) Demand functions are said to be "invariant with respect to monotonic transformations of the utility function". Explain what this means in simple English, using the help of a diagram. [25 Marks] (c) State the Law of Demand and explain it in terms of income and substitution effect. [25 Marks] (d) Using a diagram, perform an income-substitution effect decomposition of the effect of a decrease in wage rate for an individual that can choose to work as many hours as wanted and consumes two "goods" Leisure (R) and Consumption (C). Explain briefly. [25 Marks] Jane does not receive any non-labour income and therefore has to work for a living. She can earn 6 an hour and can choose how many hours to work per day (24 hours). Her utility function over "goods" (measured in ) and leisure is given by U = 3/4 log R + log C, where R represents leisure and C goods. (a) What type of utility function is this? [10 Marks] (b) Set up and solve the utility maximisation problem that Jane faces. How many hours does she work and how much money does she earn? [30 Marks] (c) Jane finds out that she can claim some money from government. This is not conditional on her working, and it is possible that now she will decide not to work. Show how this possibility might come about on a diagram which also shows your answer to (b). [30 Marks] (d) Using the data from part (a) derive the equation of Jane's income expansion path and show that Jane will continue to do some work as long as the government pays her less than 48 per day. [30 Marks] 1. 2. (a) State the Axiom of Monotonicity and explain what its main consequences are. [25 Marks] (b) Demand functions are said to be "invariant with respect to monotonic transformations of the utility function". Explain what this means in simple English, using the help of a diagram. [25 Marks] (c) State the Law of Demand and explain it in terms of income and substitution effect. [25 Marks] (d) Using a diagram, perform an income-substitution effect decomposition of the effect of a decrease in wage rate for an individual that can choose to work as many hours as wanted and consumes two "goods" Leisure (R) and Consumption (C). Explain briefly. [25 Marks] Jane does not receive any non-labour income and therefore has to work for a living. She can earn 6 an hour and can choose how many hours to work per day (24 hours). Her utility function over "goods" (measured in ) and leisure is given by U = 3/4 log R + log C, where R represents leisure and C goods. (a) What type of utility function is this? [10 Marks] (b) Set up and solve the utility maximisation problem that Jane faces. How many hours does she work and how much money does she earn? [30 Marks] (c) Jane finds out that she can claim some money from government. This is not conditional on her working, and it is possible that now she will decide not to work. Show how this possibility might come about on a diagram which also shows your answer to (b). [30 Marks] (d) Using the data from part (a) derive the equation of Jane's income expansion path and show that Jane will continue to do some work as long as the government pays her less than 48 per day. [30 Marks]
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