Question

Suppose that the representative consumer's preferences change, in that his or her marginal rate of substitution of leisure for consumption increases 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 equilibrium 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.



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  • CreatedDecember 05, 2014
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