Answer to Question #196830 in Microeconomics for Saman Khalil

Question

Consider a couple decision about how many children to have. Assume that over a life time a couple has 200000 hours of time to either work or to raise children. The wage is $10 per hour. Raising a child takes 20000hours of time.

a. draw a budget constraint showing the trade off between lifetime consumption and the number of children ignore the fact that children come only in whole numbers. show indifference curves and an optimum choice.

b. Suppose the wage increases to $12 per hour. Show how the budget constraint shifts. Using income and substitution effects, discuss the impact of the change on the number of the children and lifetime consumption.

c. We observe that as a society that, as societies get richer and wages rise, people typically have fewer children. Is this fact consistent with this model. Explain

Answer 1

The trade-off between lifetime consumption and the number of children shows the budget constraints.

In the above graph, a couple has 200,000hrs and the wage rate is $10 each hour . Time spent in the house raising a child is 20,000 hrs.

The budget line is tangent to the indifference curve IC1 and at point E is the optimal choice.

(b)

If the wage increases to $12 each hour,

$10,000×12=\$120,000$

If the wage rate increases, effect shows on both income and substitutions.

(c)

If wage increases, society income level become high. Couple has few children because of both effects.