Question

can someone please explain the bonus question to me please.

10:31 AM Thu Oct 31 + 83% B 0 a) necessarily increases consumption in the first period. b) does not change consumption in either period. c) necessarily increases consumption in the second period. d) necessarily increases consumption in the first and second period. e) necessarily decreases consumption in the first and second period. BONUS 7) Suppose that two consumers have different endowments but the same present value of disposable income. If they pool their disposable income and consume half of their total disposable income in each period, a) only the consumer with more period 2 income is better off than if they consumed their respective disposable income in both periods. b) they are both worse off than if they consumed their respective disposable income in both periods. c) they are both better off than if they consumed their respective disposable income in both periods. d) only the consumer with more period 1 income is better off than if they consumed their respective disposable income in both periods. e) there is not enough information to answer the question. 8) The fact that hours worked are roughly constant over long periods of time suggests that increases in total factor productivity in the long run a) produces no income effects. b) produces no substitution effects. c) produces a substitution effect which dominates the income effect. d) produce substitution and income effects that cancel each other out. e) both (a) and (b) are true.

Answer 1

7) Given: Two consumers have different endowments but the same present value of the disposable income. If they pool their disposable income and consume half of their disposable income in each period, then

answer) option c) they are both better off than if they consumed their respective disposable income in both the periods.

Explanation: Suppose, there are two consumers- A and B. Consumer's A and Consumer's B disposable income in period 1 are $100 and $ 200 respectively. Consumer's A and Consumer's B disposable income in period 2 are $200 and $100 respectively.

If they pool their disposable income and consume half of their disposable income in each period, then each will consume $150 in each period.

If they don't pool their disposable income, then Consumer A can only consume $100 in period 1, whereas, in period 2, Consumer B can only consume $100(which is less than $150)

Therefore, they both get better off.

8) The fact that hours worked are roughly constant over periods of time suggests that increase in total factor productivity in the long run produces no substitution and no income effects(answer: option e)

Explanation:In Long run productivity, due to constant working hours, income effect and substitution effect have no value because of fixity of factor. Fixity of factor is the principle cause. As on average the working hours provided by the factor of production remains roughly constant, it fails to produce any income or substitution effect.

note: Income effect refers to change in quantity demanded when real income of the buyer changes owing to change in price of the commodity.

Substitution effect: Substitution effect refers to substitution of one commodity for the other when it becomes relatively cheaper.