Question

6. Suppose 15 year old Willy has saved $5,000. Willy’s uncle offers to pay him $5,000 if he spends nothing on any legal ‘vice’ activity (gambling, alcohol or tobacco consumption) prior to Willy’s 21st birthday. Without this monetary incentive, Willy would choose to spend $6000 on ‘vice’ activities. a) Graphically depict a situation in which his uncle’s “reward” (or bribe) to Willy for spending nothing on ‘vice’ activities could have been as little as $3,000, and yet it would still have been effective in deterring rational Willy spending any money on ‘vice’ activities prior to reaching the age of 21. Label your graph fully and explain why your graph shows this. b) In a separate diagram, graphically depict a situation in which Willy’s uncle would have to offer him a reward of $6000 in order to induce him to avoid any expenditure on vice activities.

Answer 1

In the above graph point A shows the point where willy does not spend money and accepts the offer of his uncle of 5000$.

Point C shows a situation in which willy would not spend any money on vice activities for a bribe of 3000$

Point A in above figure shows am offer of 6000 $ for willy to not spend on vice activities.

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