Exercise 2

Mr Wonka is an employee of a company. He earns a regular salary and consumes two goods, x (chocolate) and y (other goods). One day he discovers that he inherited a state in a chocolate factory (with guaranteed sales) which provides him with a regular supply of x (with a bar above, the X should be typed with a bar (-) above but I did not know how to do that) chocolate per period. One of the endowment stipulations was that he cannot sell any part of his inheritance. However, he would have to pay a tax (at a rate of t less than 1)>

(a) Describe Mr Wonka’s choice of x and y before he received his inheritance.

(b) How would the inheritance affect his position? Would it make a difference whether he wishes to consume more or less than X (with a bar)?

(c) Suppose now that there is an increase in the inheritance tax rate t. Analyse the effects it will have on an individual who consumes more than x (with a bar) and the one who consumes less than x (with a bar). How would your answer change had X been an inferior good?

Things to consider:

(i) Will Mr Wonka consume his own inheritance first or will he first buy from the market?

(ii) Does the inheritance change his money income (Io)?

Anyone knows how to do the above question?

Need HELP!!!