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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....

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Microsoft Word - Assignment 3 Questions.docx
    
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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)
Answered Same DayMar 09, 2022

Solution

Komalavalli answered on Mar 10 2022
64 Votes
a)
Problem: Life cycle Model
Childhood – c
Adulthood – a
Elder hood – e
Interest rate
Budget constraints are
Childhood: Cc+sc = y
Adulthood: Ca= (1+r)sc + ya
Elder hood: Ce= (1+r)(sa) + ye
)
Budget constraint
Interest rate
c)
Wage , skills up gradation and working performance are positively co
elated one.
In example one Phase I, Mary wage decreases when she is not realizing...
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