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Unformatted text preview: optimal consumption and leisure choices are such that the following conditions hold: & u 1 ( C & 1 ; l & 1 ) &u 1 ( C & 2 ; l & 2 ) = & (1 + r ) ( I ) & u 2 ( C & 1 ; l & 1 ) u 1 ( C & 1 ; l & 1 ) = & w 1 ( II ) & u 2 ( C & 2 ; l & 2 ) u 1 ( C & 2 ; l & 2 ) = & w 2 ( III ) ( v ) Explain the economic interpretations of equations ( I ) to ( III ) ? 1 Question 2 (This is a past-year &nal exam question) You are eating your breakfast and reading the newspaper one morning when you came across this sentence which made you thoughtful: ±For a fully-funded social security system, either it does not bind and does not make any di/erence, or it binds and people are worse o/.² Explain what this sentence means with the aid of a graph. ( Hint : First explain what a fully-funded social security system is, and then explain how people³s consumption decisions are a/ected.) 2...
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- Spring '11