What is Cohort Effect? How to disentangle the “pure” effect of age from a birth
Demonstrate how to derive the budget constraint in a dynamic life-cycle model,
where an individual lives and potentially works for N periods and there is no uncertainty
regarding the values of economic variables in the future.
Illustrate and explain the wage changes in a dynamic life-cycle model. Your answers
should include the discussion of income and substitution effects of a permanent unanticipated wage increase, an evolutionary anticipated wage increase, and a transitory unanticipated wage increase.
The features of social insurance and their impact on retirement can be modelled
along the lines of the income-leisure framework. With Y defined as income after taxes and transfers, W the wage rate, T the maximum amount of time available, l leisure, B the pension received upon retiring, p the explicit payroll tax used to finance social insurance, and t the implicit tax involved in the pension reduction through the retirement test.
a) What is the budget constraint for this individual?
b) For simplicity, the payroll tax for financing the pension is ignored. Illustrate the case
when there is a full retirement test, and fully discuss your results in words.
The Firm’s Demand for Labour in the Short Run
a) Define TRP, ARP and MRP in words.
b) What are the two profit-maximizing decision rules for the employment of labour?
c) Illustrate a firm’s short-run demand for labour in a perfectly competitive market, and
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