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Chapter 9

chapter 9 notes


Department
Economics
Course Code
ECO209Y5
Professor
Fiag
Chapter
9

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Chapter 9 notes:
Consumer:
Current Budget Constraint: C + Sp = w (h-l) + pie T
Future Budget Constraint: C = w(h l) + pie T + (1+r) Sp
Lifetime Budget Constraint: C + C/1+r = w(h-l) + pie T + (w(h-l) + pie T/1+r)
3 Assumptions:
MRS ( C, l) = w
MRS ( C,l) = w
MRS ( C, C) = 1+r (price of current consumption relative to future consumption)
If w increases, Ns(labour supplied) increases ( substitution > income)
If r increases, Ns increases ( intertemporal effect on leisure, i.e, increase in r increases the
prices of current leisure relative to future leisure, therefore one leisures less now, and works
more)
If we increases, Ns decreases.( b/c increase in we means increase in all current
consumption..leisure = current consumption..therefore increase in leisure means decrease in
Ns)
*Graph of Ns shifts to the right for increase in w and r..shifts to the left for increase in we
Slope of demand for current consumption is MPC..0<MPC<1
Increase in r shifts the Cd graph down, and increase in we shifts Cd graph up. **parallel**
**increase in we could be cause by decrease in present value of taxes or increase in future
income**
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