Economic theory and application

Economic theory and application

Economic theory and application. Using a model of constrained optimization, illustrate and explain 1) a worker’s optimum split
between free time and consumption at a given wage rate, and 2) how the worker’s preferred
choice responds to a fall in the wage rate.
(100 marks)
2. Using game theory, formally explain how climate change is a social dilemma (collective action
problem) arising from self-interested behavior. It may help to consider this as a game between
the two biggest emitters of carbon, China and the USA, where each country acts as an
independent decision-maker. How can social preferences and institutions help humans resolve
this dilemma?

Economic theory and application

3. Person A has £0 in the present period but will earn £1000 in the next period. Person B has
£1000 in the present period and will earn £0 in the next period. Using a model of constrained
optimization, contrast the consumption possibilities of Person A and Person B assuming free
access to financial markets and an interest rate of 5%. What happens to their respective
consumption possibilities if the interest rate rises to 10%?
(100 marks)
Section B: Answer AT LEAST ONE question from this section
4. Using the multiplier model, the labour market model (with wage- and price-setting curves) and
the Phillips curve, explain how excessive aggregate demand can lead to a wage-price spiral
and discuss how monetary policy can be used to stabilize inflation.
(100 marks)
5. Using the labor market model, illustrate and explain how new technology can lead, in the
long-run, to an increase in the employment rate and a rise in real wages. Then discuss how
the ability of an economy to adapt to new technologies can depend upon the adjustment and
diffusion gaps.
(100 marks)
6. What do you understand by globalization? Explain the effects of globalization on international
markets for goods, capital, and labor. In what ways has globalization amplified the spread of
knowledge and who are the main beneficiaries of this spread?