B11. The earnings ability of many people with disabilities is low and the government has decided that they would like to help them. Two policies are considered:

Policy A: Topping-up their earnings so if they earn 10 an hour, they actually receive 15

Policy B: Giving them a lump-sum of income whether they work or not

a. Draw a diagram representing the budget constraint before either of the policies is introduced [3 marks]

b. Indicate the way in which the two policies alter the budget constraint [6 marks]

c. How will policy A affect the amount of work done by people with disabilities and their

welfare? Ensure your answer discusses income and substitution effects. [4 marks]

d. How will policy B affect the amount of work done by people with disabilities and their

welfare? Ensure your answer discusses income and substitution effects. [4 marks]

e. Would you prefer policy A to policy B? Justify your answer [3 marks]

B12. Google is free to use and is very useful but makes money by taking a commission on goods sold through on-line advertising that is targeted to users according to information revealed by their searches. For the purpose of this question assume this is the only way Google makes money and that there are no other search engines.

a. Many consumers find these advertisements irritating and ad-blocking software exists. Explain why consumers using the ad-blocking software can be thought of as free-riding? [4 marks]

b. If all Google users took advantage of this software what would happen to sales of goods via Google? [4 marks]

c. In this case what you would expect to happen to the market for internet search? Justify your answer. [4 marks]

d. Do you think your answer to part (a) would be the efficient outcome? Justify your answer. [4 marks]

e. If Google cannot generate revenue through advertising, what other ways are there for Google to generate revenue? [4 marks]

B13. The government imposes a tax on wages, to be paid by the employer. Assume the labour market is perfectly competitive but labour supply is completely inelastic.

a. Explain what happens to the cost of labour to the employer? [4 marks]

b. Explain what happens to the wage received by workers? [4 marks]

c. Explain what happens to the level of employment. [4 marks]

d. Do firms or workers pay the tax? [4 marks]

e. How are you answers affected by the elasticity of the labour demand curve? [4 marks]