Answer to Question #85339 in Macroeconomics for Dave

Question

Increase in human capital (12 marks)

In the one period model we assume that the representative agent can only spend its time (h) in two ways: 1)leisure, 2)hours worked. Now assume that we introduce time spent on building human capital.

i) If the representative agent choses to invest in human capital, supply labour and enjoy leisure how will this impact the budget constraint of the representative consumer? Draw the initial and new budget constraint. (3 marks)

ii) What is the impact of positive human capital on consumption, leisure, employment, output and the real wage? (6 marks)

iii) Application: How does investing in human capital benefit the economy? If income inequality increases over time how will this impact the investment people make in human capital? (3 marks)

Answer 1

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