In 3 or 4 sentences, explain whether each of the following statements is True, False or Uncertain. No points will be given for an undefended answer. Illustrate your answer with a properly labeled diagram where appropriate.
Problem 1. Suppose that Harvey can borrow or save money at the same rate of interest and is exempt from any income tax considerations. Based on current projections of interest rates, Harvey has prepared a budget that shows his lifetime income and consumption plans over two periods— Period 0, the remainder of his working life and Period 1, his retirement years. In this plan, Harvey proposes to consume more than his income in Period 0. If a new forecast shows a decrease in interest rates and if Harvey responds with a sensible adjustment to his plans, then, ceteris paribus, Harvey might now plan to consume less than his income in Period 0.
Problem 2. Penny’s father used to say, “Neither a borrower nor a lender be!” but Penny manages her money the way she likes. In her two period income and consumption plan, Penny has decided to consume each period’s full income in each period. If interest rates were to rise, Penny should not change her plans, since her utility would not be affected by interest rate changes.
Problem 3. Consider a profit-maximizing monopolist who faces a downward-sloping linear demand curve and who sells all units of output for the same unit price. Generally, this monopolist will operate where marginal revenue is non-negative, because once marginal revenue equals zero, per period profit will be zero also.
4. A Lorenz curve provides a useful means to show what portion of the population is below the poverty line at a given point in time.
5. Whether or not minimum wage legislation is in force, a monopsonist employer will always pay a lower wage and hire fewer workers than would result from the actions of a group of competitive employers in the same market.