Supposethattherepresentativeconsumer’spref- erences change, in that his or her m

Question

Supposethattherepresentativeconsumer’spref- erences change, in that his or her marginal rate of substitution of leisure for consumption in- creases for any quantities of consumption and leisure.

(a) Explain what this change in preferences means in more intuitive language.

(b) What effects does this have on the equilib- rium real wage, hours worked, output, and consumption?

(c) Do you think that preference shifts like this might explain why economies experience recessions (periods when output is low)? Explain why or why not, with reference to the key business cycle facts in Chapter 3

Explanation / Answer

a) At the margin the consumer decides that leisure is more prefered to consumption. That is the consumer now requires a bigger increase in consumption to willingness work more

b) To work out its effect . The production possibility frontier is unchanged . The consumer will now take a new point at which one of the flatter indifference curves is tangent to the production possibility frontier . Consumption will fall and leisure will rise, So the consumer will work less and produce less

c) This disturbance which some people may understand as an outbreak contagiousness, this can give a glimpse of recession when emplyoment and output both wil fail , but in thsi case real wage will rise which is inconsistent with business cycle facts

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