Microsoft Word - Assignment 3 Questions.docx
1
DEPARTMENT OF ECONOMICS
XXXXXXXXXXTerm 2
ECON XXXXXXXXXX)
Labour Economics
Assignment #3
Due by 6pm on March 10th
Total Marks: 26 Marks
Instructions:
1. Submit the completed assignment on Canvas in .pdf or .doc.
2. Refer to the syllabus for the requirements and policies of the assignments.
Problem: Dynamic Life Cycle Model is used to evaluate an individual’s life-time choices
over consumption and working.
Use your understanding of this model to answer the following questions:
a) Suppose Mary lives three periods: childhood, adulthood and elderhood. For
simplification, use “c”, “a” and “e” as the subscriptions attached to the variables
that describe Mary’s choices in different periods. Write down Mary’s life-time
income constraint. Suppose the interest rate is r. (5 Marks)
) Assume that Mary’s life is no longer divided into 3 periods. Instead, Mary is known
to live to 105-years old. Use the summation sign, ∑ (sigma), to write down
Mary’s life-time income constraint. The interest rate is still r. (5 Marks)
c) Draw a diagram to show three possible reasons for Mary to experience wage
increases in the framework of Dynamic Life Cycle Model. Give an example to each
of the three cases. Then, determine which wage increases are anticipated or
unanticipated, and permanent or transitory? (8 Marks)
d) Conduct an income effect and substitution effect analysis on the three wage
increases discussed in Part c). Rank the magnitudes of the total effects in the three
cases from smallest to largest and explain why. (8 Marks)