Question

Need answer to part c please!

2. Inter-Temporal Labor Supply Imagine an individual who lives for two periods (t 1,2) and faces a sequence of wages {W1, W2} that is known with certainty. The individual can borrow and save at an interest rate of r, and has a discount factor of 0 < 1. Each period, the individual has a total time endowment of T. They do not receive any non-labor income, and they do not start life with any assets. The individual chooses consumption and leisure in each period (C, L1, C2, L2) to maximize lifetime utility: C+ (T L2)1+ B 1+ (T- L) 2 U(C, L,C2, L) (1) 1+n 1+ 1 +1 You may assume that B>0, n 0, y2 0, and that 5(1r) 1 (3 points) (a) Write down the inter-temporal budget constraint faced by the in dividual. Explain the economic meaning of this constraint. (If you don't know this, you can "buy" the answer for 3 points) (4 points) (b) Write down the worker's optimization problem and solve for an expression indicat ing the optimal ratio of hours worked in period 2 relative to period 1 Н; (7 points) (c) Based on your answer to (b), and the assumption that 6(1r) 1 what would you expect to happen to an individual's hours worked over time if they correctly anticipate that their wage will increase by 10 percent? Be precise (indicate a percentage change in hours as a function of model parameters). What might happen if individuals did not anticipate the increase in wages? Thoroughly explain the difference between anticipated and unanticipated wage changes

Answer 1

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