Please answer question E 6. (continued)d) Now assume that you receive an income of £140 per week from anunknown benefactor. Show the impact on your feasible set, and showa new optimal choice in which consumption increases but laboursupply decreases. Using the concept of the marginal rate ofsubstitution, explain why this is a likely outcome.e) Now assume that, starting from the optimal point in d), yourwage increases to £18 per hour. Explain why the impact of this changeis ambiguous, and relate to the long-run historical experience ofwage growth in rich countries. 6. (See week 5 Autumn Term) Assume you can work as manyhours you wish at £12 per hour (net of tax). If you do not work,you have no income. You have no ability to borrow or lend, soyour consumption, c, is simply equal to your income.a) Derive and plot the feasible set, between daily values ofconsumption c, and "leisure", I. Label the values at the intercepts (thepoints where the feasible frontier cuts the two axes).b) Assume that your optimal choice of consumption and leisure is towork 8 hours per day. Illustrate this choice diagrammatically using thefeasible set and indifference curves.c) Use indifference curves and the feasible set to show why, giventhe properties of the optimal choice in part b), it is not optimal towork, say, 10, or 6 hours per day. (continued on next slide)

In the figure below it is shown that when hourly wage rate increases i.e. £18 per hour. labors will…

6. (continued) d) Now assume that you receive an income of £140 per week from an unknown benefactor. Show the impact on your feasible set, and show a new optimal choice in which consumption increases but labour supply decreases. Using the concept of the marginal rate of substitution, explain why this is a likely outcome. e) Now assume that, starting from the optimal point in d), your wage increases to £18 per hour. Explain why the impact of this change is ambiguous, and relate to the long-run historical experience of wage growth in rich countries.

6. (continued) d) Now assume that you receive an income of £140 per week from an unknown benefactor. Show the impact on your feasible set, and show a new optimal choice in which consumption increases but labour supply decreases. Using the concept of the marginal rate of substitution, explain why this is a likely outcome. e) Now assume that, starting from the optimal point in d), your wage increases to £18 per hour. Explain why the impact of this change is ambiguous, and relate to the long-run historical experience of wage growth in rich countries.

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter6: Tracking The U.s. Economy

Section: Chapter Questions

Problem 4.8P

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