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Problem 1

Discussincome,substitution,andneteffectsofthefollowingshocksonthelife-cyclelabour supply and compare the analysis to the static case:

1. increase in the market interest rate

2. anticipated decrease in mid-career wages [motherhood wage penalty for women] 3. increase in pre-labour market entry savings (A0 > 0)

Problem 2

Suppose that a single mother has preferences over leisure Zrest and the human capital [academic achievement] of her child Zac. She can work in the labour market at the rate of w and she receives a child-support payment of C.

Suppose that the human capital of her child is produced with commodities for children [books, toys, tutors, medicine, etc.] Xmkt and the time that the mother spends with the child hch. In particular, the mother needs d units of time and b unit of commodities to produce a unite of child’s human capital Zac. Suppose that the price of commodities for children is p. Resting requires only leisure time.

1. Suppose that the mother wants the child to be assessed ready for kindergarten, which requires the level of human capital Zac = 100. How many units of time and commodities does she need to invest? How many units of time does she need to work to buy these commodities?

2. What is her budget constraint in terms of leisure Zrest and the human capital of her child

Zac? What is the full price of one unit of a child’s human capital?

3. What is the effect of the following shocks on a child’s human capital [discuss income and substitution effects]:

(a) increase in the price of child commodities

(b) decrease in mother’s wage rate

(c) decrease in child-support

(d) increase in the time requirement of teaching a child d

Problem 3

Consider two workers with preferences over homemade food and restaurant food.

1. Suppose that worker 1 is very suspicious of the restaurant food and prefers to cook his own dinners, while worker 2 is always too lazy to cook. Draw the indifference curves in the homemade/restaurant food space for the two workers.

2. Suppose that in order to produce some positive amount of homemade food every worker needs to invest some fixed amount of time a [for example, to set up the kitchen before cooking],andtheninvestdmoreunitsoftimepereveryunitofhome-madefood[cooking]. Worker1ismoreefficientincookingthanworker2,soforhimd1 < d2,whilethefixedtime cost a isthesameforbothworkers. Whatarethebudgetconstraintsofthetwoworkersin terms of final goods? Draw the two constraints in the homemade/restaurant food space.

3. Now,supposethatanewtechnologydeviceeliminatedthefixedcostofcooking a forboth workers. What will be the effect of this change on the consumption of restaurant and homemade food [discuss income and substitution effects]?

Problem 4

Suppose that the worker receives an unexpected inheritance of CAD 50,000 at age 45. The averagehourlywage is CAD40atage 45-50andCAD35 atage 40-44. Theelasticity ofintertem-poral labour supply is 1.5. The worker’s labour supply is 40 hours per week at age 40-44, and it is 45 hours per week at age 45-50. Calculate the income effect of the inheritance on the labour supply.

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