Problem: Dynamic Life Cycle Model is used to evaluate an individual's life-time choices

over consumption and working.

Use your understanding of this model to answer the following questions:

a) Suppose Mary lives three periods: childhood, adulthood and elderhood. For

simplification, use "c", "a" and "e" as the subscriptions attached to the variables

that describe Mary's choices in different periods. Write down Mary's life-time

income constraint. Suppose the interest rate is r.

b) Assume that Mary's life is no longer divided into 3 periods. Instead, Mary is known

to live to 105-years old. Use the summation sign,

(sigma), to write down

Mary's life-time income constraint. The interest rate is still r.

c) Draw a diagram to show three possible reasons for Mary to experience wage

increases in the framework of Dynamic Life Cycle Model. Give an example to each

of the three cases. Then, determine which wage increases are anticipated or

unanticipated, and permanent or transitory?

d) Conduct an income effect and substitution effect analysis on the three wage

increases discussed in Part c). Rank the magnitudes of the total effects in the three

cases from smallest to largest and explain why.