DEPARTMENT OF ECONOMICSECON223.3 (01) LABOUR ECONOMICS2015-2016 Term 1Assignment 2Due on October 14thQuestion 1 What is Cohort Effect? How to disentangle the “pure” effect of age from a birthcohort effect?Question 2 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 uncertaintyregarding the values of economic variables in the future.Question 3 Illustrate and explain the wage changes in a dynamic life-cycle model. Your answersshould include the discussion of income and substitution effects of a permanent unanticipatedwage increase, an evolutionary anticipated wage increase, and a transitory unanticipated wageincrease.Question 4 The features of social insurance and their impact on retirement can be modelledalong the lines of the income-leisure framework. With Y defined as income after taxes andtransfers, W the wage rate, T the maximum amount of time available, l leisure, B the pensionreceived upon retiring, p the explicit payroll tax used to finance social insurance, and t theimplicit 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 casewhen there is a full retirement test, and fully discuss your results in words.Question 5 The Firm’s Demand for Labour in the Short Runa) 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, andexplain.The end.1

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