Question
In: Economics
Consider an agent who lives two periods. He is unemployed at the beginning of the first...
Consider an agent who lives two periods. He is unemployed at the beginning
of the first period and has a wage offer of w. If he accepts the wage offer w,
he will work at that wage in both periods. If he rejects the o§er, he receives
unemployment benefit of $4 this period and he gets to draw a new wage offer
next period. There are only two possible offers with equal probability next
period: one wage offer at $8, and another offer at $24. The worker's objective
is to maximize the sum of expected discounted earnings. The discount factor is
r=.5.
(a) How much would the agent value today a dollar tomorrow?
(b) What is the expected value of the potential o§ers?
(c) What is the value for the worker if he accepts the current offer?
(d) What is the value for the worker if he rejects the current offer?
(e) What is the lowest value for w for the worker to accept the offer?
(f) Suppose the government increases the unemployment benefit to $6. How
is your answer in (e) affected?
Solutions
Rahul Sunny answered 2 years agoRelated Solutions
An Individual lives for two periods, 1 and 2. In the first he works and earn...
An Individual lives for two periods, 1 and 2. In the first he
works and earn an income of M. In the second he is retired and has
no income.
His/her life time utility is a function of how much he consumes
in the two periods. C1 denotes consumption in period 1 and C2
consumption in period 2. (Hint: If you want to, you can view and
treat C1 and C2 as any pair of “goods”, e.g. good x and...
An Individual lives for two periods, 1 and 2. In the first he works and earn...
An Individual lives for two periods, 1 and 2. In the first he
works and earn an income of M. In the second he is retired and has
no income.
His/her life time utility is a function of how much he consumes
in the two periods. C1 denotes consumption in period 1
and C2 consumption in period 2. (Hint: If you want to,
you can view and treat C1 and C2 as any pair
of “goods”, e.g. good x and...
An Individual lives for two periods, 1 and 2. In the first he works and earn...
An Individual lives for two periods, 1 and 2. In the first he
works and earn an income of M. In the second he is retired and has
no income.
His/her life time utility is a function of how much he consumes
in the two periods. C1 denotes consumption in period 1
and C2 consumption in period 2. (Hint: If you want to,
you can view and treat C1 and C2 as any pair
of “goods”, e.g. good x and...
Consider an individual that lives for two periods. She only works in the first period and...
Consider an individual that lives for two periods. She only
works in the first period and receives a labor income equal to 200
Euros. Additionally, this individual receives a non-labor income
equal to 20 Euros in each period. The interest rate in the economy
is 10 %. She can consume in period 1 (c1) and in period 2 (c2). The
price of the consumption good is equal to 1 in both periods. The
individual has a Cobb-Douglas utility function of...
Consider a general model of intertemporal consumption. Paul lives for two periods, working in the first...
Consider a general model of intertemporal consumption. Paul
lives for two periods, working in the first and retiring in the
second. Paul’s income is 1000 in the first period and is 0 in the
second period. He must decide how much to consume in the first
period and how much to save for consumption in the second period.
Any money that Paul saves in the first period will earn a 5%
interest. For the questions below, you only need to...
Consider an individual who lives for two periods t = 1, 2. Suppose she is in...
Consider an individual who lives for two periods t = 1, 2.
Suppose she is in debt and, given an interest rate r, she optimally
decides to consume (C1;C2). Now, imagine that the interest rate r
falls. What do you expect to happen to her optimal consumption in
the two periods? Explain your answer referring to income and
substitution e§ects, to the budget constraints, and the Euler
equation.
Jenifer lives two periods. In the first period her income is fixed at $10,000; in the...
Jenifer lives two periods. In the first period her income is
fixed at $10,000; in the second it is $20,000. She can borrow and
lend at a rate of 10%.
The interest rate increases to 15%. Intuitively (you don’t have
to draw the graph) what do you expect this to do to her saving?
Explain.
Imagine Jenifer can only save, but cannot borrow. If she still
faces an interest rate of 10%, show her budget constraint.
Would this borrowing constraint...
5. Doogie lives for four periods. He has just completed the first period of his life...
5. Doogie lives for four periods. He has just completed the
first period of his life (by getting his
high school diploma). Doogie is trying to decide on his future
career path. He’s very good at
opening things up and fixing them, so he has narrowed his
options to two possible paths. He will
either become an auto mechanic or a brain surgeon.
•If Doogie becomes an auto mechanic, he will earn $25,000 as an
apprentice in
period 2, $50,000...
5. Doogie lives for four periods. He has just completed the first period of his life...
5. Doogie lives for four periods. He has just completed the
first period of his life (by getting his high school diploma).
Doogie is trying to decide on his future career path. He’s very
good at opening things up and fixing them, so he has narrowed his
options to two possible paths. He will either become an auto
mechanic or a brain surgeon. •If Doogie becomes an auto mechanic,
he will earn $25,000 as an apprentice in period 2, $50,000...
Assume a consumer lives for two periods. His income and consumption in the two periods are...
Assume a consumer lives for two periods. His income and
consumption in the two periods are Y1 and C1,
and Y2 and C2 respectively. Ignore price
level changes and further assume that this consumer saves income
(S) in the first period and this saving earns interest. With
consumption in two periods being constrained by income in the two
periods derive the intertemporal budget constraint.
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